SDR currency: IMF backs inclusion of yuan in reserve currencies

China welcomes decision, says it would strengthen global financial system

BEIJING: China welcomed backing from the IMF over the inclusion of yuan in its reserve currencies on Saturday and said the move would strengthen the world’s financial system.

China, now the world’s second-largest economy, asked last year for the yuan to be added to the elite basket of Special Drawing Rights (SDR) currencies, but until recently yuan was considered too tightly controlled to qualify.

It now looks that the yuan will be formally admitted to the IMF’s SDR currency basket by the end of the month, marking a milestone in China’s efforts to become a global economic power. “The fund now deems the yuan meets the requirements to be a ‘freely usable currency’,” said IMF Chief Christine Lagarde.

The yuan hit headlines in August when China’s central bank devalued the currency saying it would use a more market-oriented system to calculate the point around which the currency could trade each day.

The move sent markets into a tailspin as investors took it as a sign of slowing growth in China - a key driver of world economy, but the central bank said on Saturday that such reforms had taken it closer to joining the SDR basket.

“China thinks that the inclusion of the RMB (yuan) into the SDR basket will strengthen the representativeness and the attraction of the SDR and that it will also improve the existing international monetary system,” the People’s Bank of China (PBoC) added. “It will have win-win benefits both for China and the world.”

Including the Chinese currency in the SDR would likely boost demand for yuan-denominated assets among central banks, and give it a sheen of respectability at a time when many investors are questioning Beijing’s ability to manage the slowing economy.

Lagarde said the IMF experts ruled Beijing had addressed all remaining operational issues required for the SDR inclusion, which would be decided by the executive board at a meeting on November 30. “I support the staff’s findings,” she said, adding to expectations that the board would also back the yuan. That would mark an about turn from the beginning of August -- before the yuan devaluation -- when the Fund said the currency was not freely usable enough to be included in the basket.

Despite the recent misgivings, there has been strong pressure for the IMF to act now as the SDR basket is only reviewed every five years. If a decision to include the yuan is made this month, the actual inclusion could take place as late as September 30, 2016, giving Beijing more time to prepare.

Published in The Express Tribune, November 15^th, 2015.

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