At least $1 trillion of global reserves will switch into Chinese assets if the International Monetary Fund endorses the yuan as a reserve currency this year, according to Standard Chartered Plc and AXA Investment Managers.
People’s Bank of China officials have called for the IMF to include the yuan in its reserve basket -- which consists of the dollar, euro, pound and yen -- in a review later this year. An inclusion could spur as much as 6.2 trillion yuan ($999 billion) of net purchases of China’s onshore bonds by end-2020, Standard Chartered estimates. AXA Investment Managers says about 10 percent of the $11.6 trillion of global reserves will flow into yuan assets. It didn’t give a timeframe.
“What is significant is the seal of approval by the IMF that the yuan has internationalized as a reserve currency,” Aidan Yao, senior emerging-market economist at AXA Investment, said in a briefing in Hong Kong on Thursday. “It could trigger a reallocation of global reserves portfolios.”
China is making the yuan more freely usable in order to be included in the IMF’s Special Drawing Rights basket, PBOC Governor Zhou Xiaochuan said in Washington on April 18. The currency failed to qualify in a 2010 review.
The yuan reclaimed fifth place in global payments this March, according to the Society for Worldwide Interbank Financial Telecommunication. Standard Chartered said the Chinese currency has a 60 percent chance of getting reserve status this year.
“The renminbi broadly meets SDR criteria,” Standard Chartered analysts including Becky Liu and Eddie Cheung wrote in a research report Friday. “Even if the decision to include the renminbi is deferred, we see a high degree of certainty for inclusion in 2020, or possibly earlier via an interim review.”
The dollar has a 41.9 percent weighting in the SDR basket, and the euro has 37.4 percent, according to the IMF website. The pound commands 11.3 percent and the yen’s share is 9.4 percent. The yuan can get a potential weighting of about 13 percent, according to an estimate by Bank of America Merrill Lynch in March. HSBC Holdings Plc said in an April note that the yuan’s share could be 14 percent, reflecting China’s importance in global exports.
“SDR inclusion in 2015 would likely have a significant market impact, driving an immediate sharp increase in global diversification into renminbi assets,” Liu and Cheung wrote.