The proportion of major currencies in the SDR basket, an international reserve asset created by the IMF to supplement the official reserves of its member countries, was adjusted last Saturday, May 14, with dominant increases in the yuan and dollar.
The International Monetary Fund said, based on developments in trade and financial markets over the period 2017-2021, the updated weights in the SDR basket maintain the same ranking as the initial weights set in the 2015 review, with slightly higher weights for the U.S. dollar and the Chinese renminbi and, accordingly, somewhat lower weights for the British pound, the euro, and the Japanese yen.
Yuan’s weighting in the basket increased to 12.28% from 10.92%. Although the yuan’s value has reduced recently, it has increased about 2% against the dollar since 2016 and appreciated about 6% against its major trading partners.
Being added to the SDR basket is a huge step in the renminbi’s internationalization, something Beijing coveted in its quest for international economic recognition. China also attempted to enhance the global status of its currency by promoting the use of the “digital yuan” in a group of economies belonging to its cross-border infrastructure “Belt and Road” initiative.
According to Nikkei Asia, many pundits are skeptical that the yuan will become the key currency even if China supersedes the United States as the world’s biggest economy, given that the exchange rate of the yuan is not necessarily determined by the market, unlike that of the dollar.
The new basket will become effective on August 1, 2022.