IMF's Inclusion of Yuan in Special Drawing Rights Basket Won't Mean Much for Investors
The International Monetary Fund's decision to include China's yuan in its special drawing rights currency basket won't amount to a whole lot for investors, according to one expert.
"It's not like when a stock gets added to the S&P 500, where all of a sudden there are fund managers that need to buy it," said Greg Anderson, head of FX strategy at BMO Capital Markets, based in New York. "Nobody needs to go out and buy renminbi tomorrow because it was put in the SDR basket -- no one buys the SDR basket, but it's a symbol that the IMF approves of what the reformers have been doing with the currency."
The yuan's reserve status puts it on similar footing to the dollar, euro, pound and the Japanese yen, currencies already included in the prestigious basket.
But with this move, the pressure is on for China to become transparent and allow its currency to trade more freely.
"The reformers in China have won a big victory," Anderson said. "I think it is an important step along the path towards what I think everyone wants them to get to eventually, which is a freely traded and floating currency."
The IMF reviews its currency basket every five years.
"[The decision] is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," said IMF managing director Christine Lagarde in a statement.
Anderson said the IMF's use of the word 'renminbi' in its announcement could be significant.
"There are two versions of the Chinese currency -- there's the onshore, which goes by the name of yuan and the offshore, which goes under the acronym CNH," Anderson said. "Renminbi is the umbrella that refers to both, so we don't know which unit is included."
China's currency was given a roughly an 11 percent weight in the basket. Its inclusion takes effect on Oct. 1, 2016.