Last updated: 06:36 / Thursday, 19 November 2015
According to Axa IM

RMB Could Very Well Join the IMF’s Special Drawing Right Basket This Year

RMB Could Very Well Join the IMF’s Special Drawing Right Basket This Year
  • RMB could join the SDR after November 30
  • The RMB would become the fifth reserve currency

While the International Monetary Fund will decide later this month if the Renminbi (RMB) joins their Special Drawing Right (SDR) basket this year, Axa Investment Management’s Aidan Yao and Jason Pang think the Chinese currency stands a very high chance (80%) of being included in it, making the RMB the fifth reserve currency.

According to the analysts, “this will trigger a direct rebalancing of the SDR portfolio, but we think the seal of approval by the IMF on the RMB’s reserve currency status will also affect the investment decisions of other investors.” They estimate, subject to significant uncertainties, and contingent on the unfolding of their baseline case of economic soft-landing without large scale financial crisis, that inclusion would trigger an aggregate inflow of up to $600 billion from supranational, official and private investors over the next five years. Averaging $120 billion per year starting from 2016.

Pang and Yao believe that the capital inflows will likely have an important impact on China’s currency, money and bond markets in the coming years. In regards to currency they anticipate that in the short run, the RMB will maintain some degree of stability in normal market conditions and that in the longer run, there is a chance the exchange rate will mutate from the semi-crawling peg to a managed float as the end-game.  While when it ocmes to the Bond Market, the analysts' base-case scenario is a constructive outlook for the bond market, driven by increased demand from the SDR inclusion, and supported by lower GDP growth and policy easing.

The IMF's executive board will vote on inclusion on November 30.

You can read the full report in the following link.