China has been attempting to get the International Monetary Fund to include its currency into the reserve-assets classification, also known as the special drawing rights, for some time now and the decision, which could have huge ramifications on global markets, is finally getting closer.
The Importance of SDR
While many investors do not consider the inclusion of the Yuan into the SDR an important factor or one that could influence financial markets some analysts warn that this is not the case for China.
The decision by the IMF to include China’s currency into the SDR basket could mean full integration of China into global financial markets. If the Yuan is accepted as one of the SDR currencies, China will most likely prefer to gradually depreciate it against the U.S. dollar. This would generally spell good news, as it would allow time in the West, to absorb the real income gains.
However, if the Yuan is denied, China will most likely not wait an additional five years to be deemed acceptable by the West. Instead it could decide to stop being a responsible global economy and go for a single large devaluation which could cause yet another major global financial crisis.
While this scenario may seem a little extreme considering membership is not seen as that important to investors in the West, for China, this is hugely important issue. Having its currency added into the SDR basket together with the Euro, U.S. dollar, the British Pound, and the Japanese Yen would be seen as recognition of the Yuan’s political importance in the world. A final decision by the IMF should be made sometime this month, and could mean a shift in trillions of dollars as it would represent an acknowledgment that the currency has finally become a global, international currency.