Despite the selloff in Chinese equities, with some analysts comparing it to the 1929 Wall Street crash, one bank says it will not necessarily have negative effects on the country’s economy, or even in the yuan’s quest to becoming a world reserve currency.
“The sharp decline in Chinese stocks and the policy response is important for global investors but not on the grounds commonly cited,” said analysts from Brown Brothers Harriman in a note to clients on Tuesday.
“It is unlikely to have a major impact on the Chinese economy. It is unlikely to be a key factor in the IMF’s decision regarding the composition of the SDR basket.”
The Chinese yuan is the next currency to be considered by the International Monetary Fund to become a part of the organization’s special drawing rights basket – a basket of currencies, including the U.S. dollar, British pound sterling, the euro and the Japanese yen. SDRs are used as supplementary foreign exchange reserve assets by the IMF.
Looking first at the yuan’s race to becoming a reserve currency, the analysts noted that formal requirements for the currency to be considered for SDRs are the country’s export share, “which is not an issue for China,” and that the yuan be “freely usable.”