Dear PGM Capital Blog readers,
In this weekend blog article, we want to elaborate on the fact that the Chinese Yuan, has moved closer in joining the prestigious IMF Special Drawing Rights currency basket.
On Saturday November 14, the IMF staff and chief Christine Lagarde, officially green lighted the acceptance of China’s currency – the Renminbi or Yuan – into the IMF’s foreign exchange basket, also known as the Special Drawing Rights.
The recommendation paves the way for the IMF executive board, which has the final say, to place the yuan on a par with the U.S. dollar Japanese yen, British pound and Euro at a meeting scheduled for coming Monday, November 30.
Joining the Special Drawing Rights (SDR) basket would be a victory for Beijing, which has campaigned hard for the move, and could increase demand for the yuan among reserve managers as well as marking a symbolic coming of age for the world’s second-largest economy.
IMF chief Christine Lagarde said in a statement that the staff experts, in their report to the IMF board, ruled the yuan or renminbi (RMB)
“meets the requirements to be a ‘freely usable’ currency.“
That was a key hurdle to the yuan joining the yen, dollar, pound and euro in the Fund’s “special drawing rights” currency basket, seen as the leading currencies of international commerce.
The executive board, which represents the IMF’s 188 members, is seen as unlikely to go against a staff recommendation and countries including France and Britain have already pledged their support for the change.
This would take effect in October 2016, during China’s leadership of the Group of 20 bloc of advanced and emerging economies.
At this point only an explicit veto by US political interests deep behind the stage can derail the CNY’s ascension into the SDR. The United States, the IMF’s biggest shareholder, has said it would back the yuan’s inclusion if it met the IMF’s criteria.
PGM CAPITAL COMMENTS:
The IMF SDR – a virtual currency whose value is currently based on the yen, euro, pound and dollar – is an international reserve asset that the IMF uses for emergency lending to its members.
While SDR is not a freely traded currency, it serves as an international reserve asset. The IMF issues its crisis loans valued in SDRs, which came in handy during the financial crisis when it helped bolster member nations’ official reserves.
China, now the world’s second-largest economy, asked last year for the yuan to be added to the grouping.
But until recently the yuan’s exchangeability on international markets has been too tightly controlled by Beijing for it to fully qualify.
This year, China has rolled out a flurry of reforms recently to liberalize its markets and also help the yuan meet the IMF’s checklist, including scrapping a ceiling on deposit rates, issuing three-month Treasury bills weekly and improving the transparency of Chinese data.
The United States, the Fund’s biggest shareholder, has said it would back the yuan’s inclusion if it met the IMF’s criteria, a U.S. Treasury spokesperson said, adding:
“We will review the IMF’s paper in that light.“
If a decision to include the yuan is made on coming Monday, November 30, the actual inclusion could take place as late as September 30, 2016, giving Beijing more time to prepare.
Some currency analysts say making the yuan the fifth currency in the basket could eventually lead to global demand for the currency worth more than US$500 billion.
While the inclusion of the yuan would be a public acknowledgement of China’s clout in the global economy, it would also put further pressure on the government to take steps toward creating a more open, market-oriented economy.
In a statement the PBOC said:
“The inclusion of the RMB in the SDR basket would increase the representativeness and attractiveness of the SDR, and help improve the current international monetary system, which would benefit both China and the rest of the world“
Until next week.