Just the US dollar, the euro, Japan’s yen and the British pound are currently part of this select band.
Earlier this month, IMF head Christine Lagarde backed the yuan’s inclusion.
If the decision is made, the yuan is likely to join the basket next year, experts said.
China is the world’s second largest economy behind the US, and asked for its currency to become a reserve currency last year.
The Financial Times said the inclusion of the Chinese yuan may be “like many Chinese financial reforms: significant in hindsight but harder to get excited about in its early stages.” The current value of all SDRs is around $280 billion, and most economists estimate that the yuan’s inclusion will take up around 10 percent of the value of the currency basket. This equates to $28 billion—a small amount compared to the huge volumes traded worldwide.
Other analysts predict the inclusion of the yuan will have a large impact over the following few years. Standard Chartered PLC predicts the inclusion could spur up to $1 trillion of net purchases of China’s onshore bonds by the end of 2020. AXA Investment Managers predict that about 10 percent of the $11.6 trillion of global reserves will flow into yuan assets.
The bond market has largely been dominated by the United States, which accounts for about 44% of the market. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated at $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets Association (SIFMA).
Beijing has made determined moves to give global money managers access to its previously closed-off $6.4 trillion market, allowing foreign banks to tap its short-term lending markets for the first time and doing away with some investment restrictions.
While the moves mark a significant moment for China’s financial-market liberalization, the pickup has been slow. Foreigners own less than 3% of Chinese bonds.
SOURCES – Wall Street Journal, Financial Times, Goldman Sachs, The Trumpet, Wikipedia, BBC News