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Yuan's IMF SDR entry no immediate major effect on sovereign credit profile: Fitch
THE inclusion of the Chinese yuan in the International Monetary Fund's (IMF) Special Drawing Rights (SDR) currency basket will have no immediate significant effect on the sovereign credit profile, says Fitch Ratings.
The credit rating agency says new incremental demand for the yuan arising directly from joining the SDR is likely to be marginal, and it remains unclear to what extent it will boost broader long-term usage of the currency among reserve managers.
It says being a part of the SDR basket is not a sufficient condition for the yuan to be considered a reserve currency, nor will it necessarily result in a sudden spike in the allocation of reserves to yuan assets. It cited the examples of other currencies like the Canadian dollar and Australian dollar, which are held more widely as central bank reserve assets without being a part of the SDR basket.
Furthermore, yuan-denominated assets do not currently qualify as foreign reserves according to the IMF - despite the inclusion of the yuan in the SDR weighting - because of China's capital controls, it adds.
"Inclusion in the SDR basket is neither a quick fix nor an alternative to the broader structural reform agenda,'' Fitch says.
The speed at which the yuan develops into a global reserve currency will depend on the extent to which central banks and sovereign wealth funds begin to see the currency as a viable store of liquidity and value to rival that of the US dollar.
"Such a shift is only likely to be gradual. It is especially unlikely in the short term so long as doubts persist over China's prospects for a smooth and orderly macroeconomic rebalancing,'' it says.
According to Fitch, China's authorities aim to lift capital controls only by 2020, which means that the full convertibility of the yuan remains a way off. Furthermore, access to yuan assets among foreign investors remains very small despite the tremendous growth in China's economy and the role it plays in global trade.
"The market for yuan-denominated debt securities remains small, and it was only this year that China allowed foreign central banks access to its domestic bond market.''
In conclusion, Fitch says the yuan's inclusion in the IMF's SDR basket may be symbolically significant for China, and marks a growing role for the country in international financial institutions more commensurate with the size of its economy. The policy process that enabled joining the SDR basket also contributed to a number of reforms to liberalise and partially open China's capital markets.
"As such, Fitch believes that joining the SDR could strengthen the economic reform process, and will enable the authorities to resist pressures to reverse any reforms to market liberalisation.''