China could see inflows of as much as $3 trillion into renminbi assets over the medium-to-long term as successful inclusion of the yuan in the International Monetary Fund's (IMF) reserve currency basket sets the stage for further opening of the country's financial markets.
Monday's momentous decision will see the Chinese yuan (CNY) (: )hold a 10.9 percent weighting in the Special Drawing Rights (SDR) basket, higher than the yen (Exchange: JPYUSD=)and sterling's (: GBPUSD=)8 percent but well below the euro's (: EURUSD=)30.9 percent and the greenback's (New York Board of Trade (Futures): =USD)42.9 percent.
"This should help underpin China's continuing efforts to internationalize the currency and its capital account—moves which, our research suggests, could lead to inflows of up to $3 trillion over the next few years," said Hayden Briscoe, managing director of Asia Pacific fixed income at asset manager AllianceBernstein (AB), on Tuesday.
Morgan Stanley meanwhile expects inflows to top $2 trillion over ten years, with flows from foreign exchange reserve managers making up the largest share, according to a Tuesday report.
But strategists are quick to point out that these inflows don't hinge just on Monday's news.
Rather, the announcement strengthens the hand of Beijing's overall financial reform agenda, which will be the key factor luring global portfolio managers, AB noted.
Bank of America Merrill Lynch estimates yuan demand created by IMF members rearranging their SDRs to be worth $35 billion, not a particularly large number for an economy of China's size.
The potential entry of Chinese A-shares into MSCI's Emerging Markets (EM) Index and relative attractiveness of renminbi assets will be the larger drivers of medium-to-long-run inflows into China, Morgan Stanley added.
While the IMF's decision acknowledges China's economic ascendance and financial liberalization achieved thus far, it's unlikely to impact MSCI's decision. Earlier this year, the index provider told Beijing that it must make greater progress on capital account liberalization before including A-shares into its global benchmark.
"The reforms China has undertaken/will undertake to achieve SDR status could help in issues like market access and liquidity, factors that index providers consider for membership," Morgan Stanley explained.
MSCI has already added U.S. listed shares of Chinese stocks , such as Alibaba (: ) and Baidu (NASDAQ: BIDU), to its EM index.
Because the IMF's move is more of a symbolical development that enhances the renminbi's prestige as an international currency, little immediate impact on Chinese bonds and stocks is expected.