Mega announcement  for the year is scheduled for November, when International Monetary Fund (IMF) will take decision in its review, whether to add Chinese currency Yuan or Renminbi in its Special drawing Rights (SDR) or not.

If IMF choose to include Yuan, in its SDR basket, it would be a milestone decision and the impact will not only be felt in financial markets but to global trade as well as geo-politics.

So we at FxWirePro thought to have a better understanding the importance of the decision, its best to know the key facts as well as visit parts of history.

What is SDR?

• SDR is an international reserve asset, created by IMF back in 1969 to support global trade, need for diversified reserve and convertibility back in 1969 to support a system not sufficient with Gold and Dollar, two key reserve assets of the time.
• SDR can be seen as mix of several currency assets, namely four.

Composition of SDR -

• SDR originally was created as substitute for Dollar and value was pegged to Dollar at parity. However that later changed to basket, which from 1974-1981 contained 16 different currencies.
• Since 1981, the number of currencies got reduced to five - US Dollar, British Pound, Japanese Yen, Deutsche mark and French Franc. Latter two was later replaced by Euro.

Weightage and review 

• Every 5 year, IMF reviews its basket to change the weightage and to consider the composition.
• Current weightages are (as per 2010 review) - US Dollar (41.9%), Euro (37.4%), Pound (11.3%) and Yen (9.4%).

Outstanding SDR and valuation 

• Total outstanding SDR now stands at 204 billion, value of which is determined from the weightage and value of the four currencies. Rate is set every day and published at IMF website.

Moving to Yuan specific facts -

IMF review date and Yuan's inclusion 

• There has no specific date for the review announcement has been announced yet, broadly it scheduled for November, this year. IMF however has given some exclusive hints that Yuan might be included in this year's review.

How likely is that Yuan will be added?

• Very much likely. According to our view at FxWirePro, Yuan will be included in the basket, what to watch out will be its weightage.
• Given outright support of UK and Germany, with conditional support from US there are few or no barriers to Yuan's inclusion at this point, given China's prominent in global trade.
• Yuan now surpassed Japanese Yen in most used currency after US Dollar to make trade payments, though it is still way behind Dollar.

Inclusion criteria and challenges -

• IMF has two key criteria - First is that the country has to be large exporter or prominent in global trade, which has not been an issue for Yuan for years and second that the currency to be freely accessible and convertible, which is where the challenge lies.
• However Chinese authorities are pursuing currency reforms at quite a speed, however IMF's inclusion of Yuan might come with conditionality attached for further reforms.

Next part in the series would discuss probable aftermath of the inclusion.