Yuan SDR inclusion finally official

Everything has changed for the RMB, declares Business Insider. That is, for the long term:

In the long term, this means everything for China's economy. Here is Paul Mackel, HSBC's head of global EM markets FX research, on the long-term impact of the yuan becoming a reserve currency:

The significance of the RMB's SDR inclusion goes beyond the potential impact of inflows intoChina. It would encourage China to stick to a much needed financial and capital account liberalization. These would over time increase financial sophistication and improve the efficiency of capital allocation, facilitating the shift to a more consumption and service driven economy. It should give China confidence in making its exchange change rate even more market driven, which would free up its monetary policy. The SDR marks an important milestone of RMB internationalization.

But in the short term, as this article reiterates, the effects are muted:

Capital Economics states the matter clearly:

In practice, what determines whether central banks are willing to consider a currency a reserve asset is their confidence that they can sell that asset whenever needed into deep and liquid markets. Inclusion in the SDR basket could be taken as endorsement by the IMF that the renminbi and China’s financial markets meet this standard. But central banks are likely to come to their own judgement (as they have in their purchases of Australian and Canadian dollar reserves).

And of course, central banks worldwide have barely begun buying yuan-denominated debt directly; this largely symbolic decision doesn't change much on the ground in that regard.

The relatively high weighting of the yuan in the SDR - 10.92 percent versus 8.33 percent for the yen and 8.09 percent for the pound - is an acknowledgement of China's sheer size and heft, far more than its present status as an internationally used currency (still less than 3 percent of all global currency transactions and not even 1 percent excluding Hong Kong).

Quartz cites the RMB's chances of becoming a true reserve currency in the next 3 years at 0 percent, stressing that the recent increase in international yuan transactions has been driven by offshore speculation in Hong Kong. Still, the 1 in 50 estimate for the next 8 years seems too pessimistic considering Beijing's pledge to liberalize the capital account in 2020. I guess we'll have a better idea a year or two or now - at which point the yuan should be no higher than 6.8 or 6.9 to the dollar - just how much sway the reformers led by central bank (PBOC) governor Zhou Xiaochuan really have with Xi Jinping.

Still, this post is to mark another milestone in China's long march to integration with the global economy.

Meanwhile, there are finally some signs of life on the state-owned enterprise (SOE) reform front; I will be posting more about this in future.