INCLUDING the Chinese yuan in the International Monetary Fund’s benchmark currency basket would give it an official seal of approval, eventually leading to global demand worth more than US$500 billion in coming years, currency analysts say.

    Inclusion of the yuan in the holdings of foreign exchange reserve managers would be a gradual process, subject to external factors with high degrees of uncertainty. But the yuan eventually might comprise nearly 5 percent of global reserves.

    The IMF’s executive board is scheduled to decide in November on the yuan’s inclusion and is expected to give the green light, although approval could be early next year, sources familiar with the discussions said.

    Being able to buy and sell the yuan will require further liberalization of China’s exchange rate controls, a process that has been years in the making and may take many more.

    Still, demand for yuan from reserve managers could counter the capital outflows from China. Those outflows have accelerated recently to record levels as the economy has slowed and markets have fallen.

    Based on its inclusion in the IMF’s Special Drawing Rights (SDR) basket, a virtual currency that values IMF reserves and emergency payouts to members, the yuan’s share of the world’s foreign exchange reserves could eventually reach around 5 percent, analysts estimate.

    That would place the yuan, or renminbi, ahead of the Canadian and Australian dollars (each almost 2 percent of reserves, according to the latest IMF data) and near sterling (4.7 percent), but still well behind the euro (20.5 percent).

    The U.S. dollar remains the world’s pre-eminent reserve currency, accounting for nearly two-thirds of all holdings.

    In the SDR itself, there are only four currencies — the dollar, euro, sterling and Japanese yen. The Canadian and Australian dollars are not part of it. The yuan would be the fifth.

    “You don’t have to be in the SDR to be a reserve currency. It helps, but it doesn’t particularly matter,” said Simon Derrick, global head of currency strategy at Bank of New York Mellon in London.

    “It’s a guessing game, but within a few years the yuan would probably be of similar size to the Canadian dollar, and well within the next decade not hugely dissimilar to sterling,” he said.

    World foreign exchange reserves stand at around US$11.46 trillion, of which the composition of US$6.666 trillion is known. It is assumed the remainder is along similar lines.

    The total value of SDRs is only around US$280 billion. Its composition, which factors in currency use in international trade flows, is rather different. Last set in 2010, it is 41.9 percent dollar, 37.4 percent euro, 11.3 percent sterling and 9.4 percent yen.

    Earlier this year, analysts at Citi conducted a “very informal” survey of 12 reserves managers with more than US$2 trillion in foreign exchange reserves under management, asking whether the yuan’s SDR inclusion would make them more inclined to add it to their foreign exchange reserves. The response was that it would.

    “SDR inclusion makes the yuan, by definition, a ‘reserve asset’, and this should catalyze capital inflows to China, but by how much, it’s hard to say,” said David Lubin, head of emerging market economics at Citi in London.

    “And since China should expect to see gross capital outflows for the foreseeable future, it’s not even clear that SDR inclusion will lead to a net capital inflow to China,” he said.

    Liu Ligang of Washington-based Peterson Institute for International Economics argued in an opinion piece earlier this year that SDR inclusion would not automatically grant it reserve currency status. (SD-Agencies)