Markets react calmly to yuan's SDR inclusion

BEIJING - Investors remained cool-headed despite the International Monetary Fund's (IMF) decision to add the yuan to its reserve currency basket in the biggest shake-up in more than three decades.

The central parity rate of China's currency the renminbi, or the yuan, weakened by 11 basis points to 6.3973 against the U.S. dollar on Tuesday, according to the China Foreign Exchange Trading System.

It also weakened against the British pound, but strengthened against the euro and Japanese yen.

The benchmark Shanghai Composite Index edged up 0.32 percent on Tuesday to close at 3,456.31 points. The smaller Shenzhen index was up 0.36 percent to 12,081.17 points.

"Expectations have been riding high that the IMF board would formally announce the yuan's inclusion, which implies that a lot of near-term expectations should already be factored into the yuan movement," HSBC said in a report.

China is capable of keeping the yuan's exchange rate at a "reasonable" level and sees no basis for continued depreciation, the People's Bank of China (PBOC) Vice Governor Yi Gang said hours after the IMF announcement.

The IMF announced early Tuesday morning Beijing time that the yuan is eligible for joining its Special Drawing Rights (SDR) basket, alongside the dollar, the euro, pound and yen.

Effective from Oct. 1, 2016, the yuan will have a weighting of 10.92 percent in the new SDR basket, while the respective weighting of other currencies in the basket are 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the pound.

The yuan will be the first developing country currency to join the basket since 1981, when the IMF whittled the basket down from its original 16 currencies in the 1970s to five. The basket was later compressed to current four as the D-Mark and French franc were subsumed into the euro.

IMF Managing Director Christine Lagarde said the yuan's inclusion into the basket is "an important milestone in the integration of the Chinese economy into the global financial system" and "a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems."

Analysts said the yuan's SDR inclusion may help address the imbalance in the international financial system, in which around one percent of global central bank reserves were held in the yuan, despite the fact that China made up 13.3 percent of the world's economy in 2014.

The move came as China strives to stabilize equity market volatility and slowing economic growth.

The market consensus is that immediate yuan demand triggered by the new formula will be negligible considering the limited asset value of total SDR outstanding.

Over the long run, the balance of risk remains tilted toward depreciation, a latest Bloomberg Brief special report commented on the issue.

Membership in the IMF's SDR club might encourage more funds to flow into China, but the capital-account opening that SDR inclusion is intended to catalyze may see even larger quantities of funds flowing out, the report said.

It projected a median forecast for the yuan to end 2015 at 6.4 against the dollar and drop further to 6.6 at the end of 2016.