A quick update on recent IMF comments.

China's CNY is no longer undervalued after years of appreciation and reforms, according to the IMF in the latest Article IV report on China. This development will help pave the way for China to be included in the IMF's Special Drawing Rights (SDR) when the allocation decision is made in November.

The IMF comments on the CNY, along with the appreciation over the years (see chart below) will make it much more difficult for political arguments that China is a currency manipulator. 

CNY % Apprication vs. Major Currencies Over Last 10 Years

CNY % Appreciation vs. Major Currencies Over 1 Year

More importantly, the developments put the CNY closer to becoming a major reserve currency. SDRs only constitute 5% of reserve assets, so flows from inclusion in the SDRs will not be as meaningful as the acceptance of the CNY as a major reserve currency.  Standard Chartered Plc. expects the IMF endorsement to lead to $1 trillion in reserve assets to be shifted to CNY over five years. A flow of $1 trillion amounts to 8.6% of the $11.6 trillion in global reserve assets.   

It will take a long time before the CNY has the potential to unseat the US dollar as the world's dominant reserve currency (see chart below). China's financial markets are not large and deep enough to replace the USD as a safe haven during times of crisis.  Much more financial and capital account reforms are needed. But, China's fast track push to be a dominant reserve currency will serve to expedite market-based reforms.

Currency as a Percent of Total Global Reserve Assets

China's acceptance as a major reserve currency will give Beijing more prestige globally. But more importantly, it could have two positive effects on China's economy. 

First, a reserve currency push could speed up financial liberalization already in the works and expedite reforms. The rates markets in China are on the doorstep of full liberalization (deposit rates are close to being driven by the market). The investment flow quotas into and out of China increase regularly. Second, an inflow into CNY assets over the next 5 years as the currency becomes a major reserve currency may keep interest rates relatively low. The inflow may also relieve the PBOC's need to liquidate foreign reserves when it wants to keep the CNY stable.