IMF Executive Board has approved China's RMB inclusion in the SDR, effective on 1 October 2016. RMB's weight in the SDR basket will be 10.9%, a bit lower than the preliminary estimates of roughly 14-16% made by IMF staff in August. RMB inclusion in IMF's SDR is a milestone event recognizing China and RMB's significance in the world economy.

The official endorsement of the RMB as a "freely usable" currency helps promote further international use of the RMB and encourages continued RMB convertibility and capital account liberalization.

"We expect the direct impact on RMB and FX flows to be limited. Over the long term, it should help increase demand for RMB assets, if China continues to deepen its domestic bond market and continues its financial market reforms including capital account liberalization. In the coming months, to control capital flight risks amidst a weak economic backdrop, the PBoC will likely continue to carefully manage RMB expectations and keep its macro prudential measures to fight against possible speculative outflows",says BofA Merrill Lynch.

RMB inclusion in the SDR may raise RMB inflows by USD31bn, given that the total allocation of the SDR is currently is USD285bn with RMB's weight at 10.9%. This is a modest amount compared to China's FX flow magnitude. Moreover, related transactions are likely done between the PBoC and IMF members over several months, implying direct impact on RMB and FX market should not be material.

Over the long term, RMB inclusion in IMF's SDR may help increase demand for RMB-denominated assets from other central banks and global fixed income fund managers. FX strategists estimate that central banks already hold around USD80bn in RMB reserves - assuming RMB eventually reaches a similar share as GBP & JPY, the additional demand could be about US$370bn. But such asset reallocation to the RMB will likely only happen at a gradual pace, and RMB's SDR currency status alone by no means guarantees it. Instead, it will require the foundation of further deepening of the domestic bond market and continued financial market reforms including capital account liberalization. And, the appetite for RMB assets will also depend on China's economic performance and RMB outlook.

"We believe policymakers will remain alert on capital flight risks, which might in turn undermine domestic financial stability, amidst a weak macro backdrop. Given recent rising market speculation of RMB depreciation, we expect the PBoC will put an emphasis on managing RMB expectations and prevent sizable capital outflows. Those capital-flow macro prudential measures, especially targeting speculative outflows will likely stay in place in the near term. Meanwhile, the PBoC may relax some FX and capital account restrictions to encourage inflows from relatively long-term investors, and carry out designated reform trials like those in the free trade zones as part of its continued capital account liberalization efforts" added BofA Merrill Lynch.