Considerations of the yuan as a reserve currency

Analysts at Brown Brothers Harriman explained that with the Chinese yuan now included in the IMF's SDR, starting with Q3 COFER data, which will not be available until the end of March 2017, the IMF will break out the yuan's share of global reserves.

Key Quotes:

"Currently, the yuan is included in the omnibus "other currencies" category. At the end of Q2, the "other currencies" account for about 3.04% of allocated reserves, down from almost 3.2% in Q1 16.

A year ago, when the IMF announced its decision to include the yuan in the SDR, it estimated that about 1% of global reserves were in the yuan. The yuan's share of global reserves is smaller than Australian and Canadian dollars' share.

We are not convinced that inclusion of the yuan in the SDR will necessarily increase the use of the yuan as reserve assets. The yen's share of global reserves, for example, remains minor, even with the recent increase. At the end of 1995, the yen accounted for nearly 6.8% of global reserves. As we have seen its share as of the end of Q2 16 was 4.5%. We suspect that for the most part, reserve managers will not accept a fait accompli by the IMF and boost yuan reserves simply because the yuan is included in the SDR.

The security, liquidity, and transparency of the yuan and the central government bond market (where reserves are expected to be invested) are important considerations. At the end of September Caixin reported that China's Ministry is considering trading government debt securities, in addition to its role as the issuer. The ostensible reason is to increase market liquidity. Turnover ratio (volume of bonds available for trading relative to the volume of the outstanding bonds, sort of like free-float) is estimated to be about 5% of the US."

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