What's the impact of adding RMB into the SDR basket

Before discussing about what the impact to RMB after it is added into the SDR basket, it is worth explaining what SDR is. SDR stands for Special Drawing Right. According to the explanation of the IMF, "The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations."

Based on this explanation, we can see that adding RMB into the SDR basket does not directly give values to RMB; therefore, it may be able to add some chemicals into the foreign exchange market but in the long term, the value of RMB will still be determined by the central bank monetary policy and the Chinese trading position. The real impact of adding RMB into the SDR is setting up a milestone of international acceptance. Such action could allow the Chinese currency, the RMB, to integrate more into the global financial activities.

The addition of the RMB lowers the proportions of the other four currencies in the SDR basket. The USD has the smallest cut in its position, then the JPY, then the EUR, and the GBP has the largest cut in its position in the SDR basket. This shows how the IMF sees the recent changes in the global trading importance of the five countries. Moreover, in terms of the shares of the five different currencies, the USD still holds the dominating position, and the GBP and the JPY seem much weaker than the other three. In addition, as the SDR basket is reviewed every five years, if we can see an increase in the RMB's share in the SDR basket, then it will be much fairer to say that the Chinese currency has increased its global importance and acceptance.