Demand unlikely to boost yuan despite basket inclusion

The International Monetary Fund's decision to include the yuan in the Special Drawing Rights basket will not directly increase the demand for yuan assets. Also, the implicit endorsement of the yuan as a reserve asset is unlikely to sway the decisions of global asset managers. Indeed, China's market interventions this year in response to capital outflows and the bursting of the equity bubble provide strong reasons for them to steer well clear.

Much of the commentary on the IMF's decision has been marred by misunderstanding of the role the SDR performs. The SDR is the unit of account used within the IMF. Its value is determined as a weighted average of the basket currencies (currently the dollar, euro, yen and the pound sterling).

IMF members hold balances denominated in SDRs. If any of them encounter balance of payments strains they can sell SDRs to other members in exchange for any of the currencies in the basket. In this way, SDRs are a supplementary reserve asset, giving access to reserve currencies. In normal circumstances, though, there is no boost in the demand for a currency simply because it is in the SDR basket.