The continued internationalisation of the Chinese yuan - as reflected in the IMF's decision to include the currency in its Special Drawing Rights (SDR) basket - will have long-term positive effects for Chinese corporates, says Fitch Ratings.

Rapidly increasing foreign holdings of yuan-denominated assets - and growth in the use of yuan in cross-border payments amid the gradual opening of the domestic market to foreigners - is likely to reduce currency-exchange costs over the long term. The yuan has risen to become the fifth-most-used currency globally for cross-border payments, according to September data, up from the No. 14 spot just three years ago. The yuan is now the most-used currency for intra-regional payments with China and Hong Kong in Asia-Pacific. As the yuan grows in popularity, the exposure gap that Chinese corporates face between their operating currency and funding currency will close.

Rising participation by international institutional investors in the local market may also serve to strengthen investor awareness of issues pertaining to corporate governance. This would include greater transparency and legal protections - areas where improvements would be credit positive for Chinese corporates. Yuan debt securities held by foreign institutions and individuals is increasing by the double-digits, with data from the People's Bank of China showing a total of CNY713bn as of March 2015. Foreign institutions' cash bond trading activities now account for just under 10% of the total trading volume in the interbank market.

Yuan internationalisation has gained momentum in 2015 as Chinese regulators announced a series of new policy measures designed to enhance the usability of the yuan for foreigners and cross-border transactions. Recent reforms have included dropping the pre-approval for certain foreign institutions to trade bonds or conduct hedging operations in the Chinese interbank bond and foreign-exchange markets. The Ministry of Finance has also committed to issuing three-month treasuries on a weekly basis to improve liquidity in the short-term yuan yield curve.

These reforms are likely to have contributed to the decision to include the yuan as part of the SDR basket at the IMF Executive Board's review meeting yesterday. As of October 2016, the value of the SDR will include a 10.92% weighting for the yuan, alongside the US dollar (41.73%), euro (30.93%), Japanese yen (8.33%) and British pound (8.09%).

The inclusion of the yuan in the SDR basket is symbolically significant, and could be a step toward including Chinese onshore securities in international indices. If so, this would be likely to have a significant effect on international institutional investors' asset allocation to onshore equities and bonds over the long term - assuming that Chinese regulators continue to loosen its capital account to meet its objective of lifting capital controls by 2020.

Increasing yuan internationalisation and liberalisation could lead to increased currency volatility. But Fitch maintains that currency volatility that may result in the short term will have only a very marginal impact on the credit profiles of Fitch-rated Chinese corporates. Outstanding foreign-currency debt at non-financial corporates in China is limited, and concentrated at large firms and state-owned enterprises which are generally in a stronger position to withstand the impact of currency volatility. Notably, the median Issuer Default Rating for the largest Fitch-rated Chinese corporates with foreign-currency debt is 'A'.