The Chinese currency will strengthen when the yuan enters the International Monetary Fund’s basket of reserve currencies as it joins the dollar, euro, pound and yen. With the importance of the yuan growing as an alternative to the U.S. dollar, investment flows into China could help support Chinese markets and country-specific exchange traded funds.
While China is the second largest global economy and one of the largest trading countries, the yuan currency has experienced limited use in the global economies, account for just a fraction of all payments in international trades. According to the Society for Worldwide Interbank Financial Telecommunications, the yuan made up just 1.72% of global payments, the lowest since 2014.
However, after Beijing’s increased regulatory improvements, the International Monetary Fund will include the yuan in the Special Drawing Rights basket on October 1, which could entice central banks and large institutions to begin acquiring more Chinese assets.
The yuan will be admitted into the IMF’s SDR basket with a weight of 10.92%, compared to the USD’s 41.73% allocation and the JPY’s 8.33% position.
The inclusion of the yuan in the SDR basket may push Beijing to implement further forms in China, including advances in its capital account liberalization. For instance, China recently implemented the Shenzhen-Hong Kong Stock Connect program to expand lists of mainland-listed companies that foreign investors can access.