Advanced Basket Weaving

The International Monetary Fund is expected to decide whether or not to expand its Special Drawing Rights (SDR) basket of currencies to include the RMB sometime in November. For China, the decision immediately implicates authorities’ attempts to maintain the public narrative of continuing on a reform driven growth trajectory. Political considerations of China’s role within international financial institutions are likely to play a greater role than rigid adherence to the IMF’s technical standards in guiding the final decision on the RMB’s inclusion, given the ambiguity of the case on technical grounds.

Generally, however, the impact of the IMF’s decision on China’s cross-border capital flows and inbound portfolio investment from foreign investors is likely to be fairly limited, particularly in the context of market expectations of additional yuan depreciation. China’s overall progress toward reform of its capital markets is likely to be more influential over capital flows and China’s balance of payments position in the medium-term.

Posted August 1, 2017
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