International Monetary Fund representatives have given China strong signals that the yuan is likely to soon join the fund’s basket of reserve currencies, known as Special Drawing Rights, Chinese officials with knowledge of the matter told Bloomberg News.
While the SDR is not technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket–currently the dollar, euro, yen and pound–to meet balance-of-payments needs. So the ability to convert SDRs into yuan on demand is crucial. Its value is currently based on weighted rates for the four currencies.
In a 2009 speech, People’s Bank of China Governor Zhou Xiaochuan said the global financial crisis underscored the risks of a global monetary system that relies on national reserve currencies. While not mentioning the yuan by name, Zhou argued that the SDR should take on the role of a “super-sovereign reserve currency,” with its basket expanded to include currencies of all major economies.
Chinese officials have since been more explicit. After meeting President Barack Obama last month at the White House, President Xi Jinping thanked the US for its conditional support for the yuan joining the SDR. Winning the IMF’s endorsement would allow reformers within the Chinese government to argue that the country’s shift toward a more market-based economy is bearing fruit.
Reason for Approval
Global use of the yuan has surged since the IMF rejected SDR inclusion in the last review in 2010. By one measure, the currency became the fourth most-used in global payments with a 2.79% share in August, surpassing the yen, according to the Society for Worldwide Interbank Financial Telecommunication, known as Swift.
The IMF uses several indicators to determine if a currency is “freely usable,” the benchmark for inclusion in the SDR basket. IMF staff members said in a report in August that the yuan trails its global counterparts in major benchmarks, such as its use in official reserves, debt holdings and currency trading. But staffers have also stressed that the fund’s 24 executive directors, who will make the final call, will need to use their judgment.
Many major economies, including the US, Germany and UK, say they’re prepared to back the yuan’s inclusion if it meets the IMF criteria. Supporting the yuan may boost relations between China and countries such as the UK, which has sought to make London a major yuan trading hub.
Adding the yuan to the basket may also help the IMF improve its standing with the Chinese. China and other emerging markets were supposed to gain greater representation at the fund under reforms agreed to in 2010, but the US Congress has yet to ratify the changes.
At least $1 trillion of global reserves will migrate to Chinese assets if the yuan joins the IMF’s reserve basket, according to Standard Chartered Plc and AXA Investment Managers.
