Does SDR membership weaken the RMB?

CHINA FINANCIAL - In Brief 02 Dec 2015 by Michael Pettis

---

There is a lot of excitement about the RMB’s having become part of the SDR basket, and so I hate to say that we risk making much ado about what, at best, is unlikely to be a very big deal, at least in the short term. Foreign investor appetite for Chinese government bonds, or indeed most other Chinese assets, is primarily going to reflect depreciation expectations, not whether or not the RMB is included in a basket that most people knew very little about even one year ago. We may see some additional purchasing by foreign central banks as a result of membership, but I doubt it will be very much, and I doubt it will happen overnight. In fact there is a cynical argument going around that now that Beijing has received what it wants from the IMF and the US Treasury, it will stop behaving responsibly – there’s no longer much to lose – and soon we’ll see the RMB depreciate sharply as China throws itself into currency war. I think this is unlikely – besides reversing the little progress China has made on rebalancing, it is hard to come up with a depreciation strategy that doesn’t risk a sharp rise in outflows, and it is also hard to believe that Beijing is indifferent to the risk of setting off US trade intervention by derailing the US recovery with a rapidly rising surplus – and so I expect the PBoC will continue to do whatever it can do to stabilize the currency in the hopes of regaining credibility. But a warning: I also thought a regime change like that which we saw in August was unlikely, and yet nonetheless it happened. The fact that it was botched might actually strengthen the hand of the PBoC, who I believe is opposed to any devaluation or depreciation of the RMB. So al...