“[E]ffective October 1, 2016 the RMB is determined to be a freely-usable currency and will be included in the SDR basket as a fifth currency, along with the US dollar, the euro, the Japanese yen and the British pound,” the IMF said in a statement.
The launch date for the new SDR basket was set for late next year in order to give time for SDR users to adjust to the RMB inclusion.
Christine Lagarde, managing director of the IMF, called the inclusion “a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.
“The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
The SDR is an alternative currency used by the IMF for its financial transactions such as loans. The SDR value is based on a weighted average of the values of the basket of currencies.
Fund managers have mentioned the various long-term benefits to China after it is put in the basket. However, some analysts argue that the inclusion is mainly symbolic, giving China a source of national pride. For example, the IMF determined the RMB is "freely-useable" but it is not fully convertable into other currencies.
Andy Seaman, CIO of Stratton Street Capital, is among the fund managers who sees the decision driving demand for the RMB. He believes that will prompt Chinese authorities to allow international investors greater access to the domestic bond market.
“With the Chinese sovereign currently rated Aa3 by Moody’s and AA- by S&P, short-dated government bonds yielding around 3% are extremely attractive to investors, particularly in Europe where credit ratings are much weaker and yields considerably lower,” Seaman said.
Aidan Yao, senior emerging market economist at Axa Investment Managers, believes the rebalancing of the SDR portfolio will result in only a $30bn inflow into the currency over the next few years begining October 2016.
However, the prestige benefits could "raise the RMB’s profile as a global reserve currency, prompting central banks, sovereign wealth funds and reserve managers to allocate towards RMB assets for their portfolio". They may be joined by pension funds and insurance companies, as China opens up its domestic capital markets.
Should all those factors come together, total inflows from all sources, including the SDR rebalancing, could result in inflows of around $600bn over the next five years, Yao estimated.