China ready for yuan to be inducted into SDR basket

By Liu Tian Source:Global Times Published: 2015-3-24 18:48:01

Inclusion would give country more of a say at IMF


Illustration: Lu Ting/GT



Christine Lagarde, director of the International Monetary Fund (IMF), said at Fudan University in Shanghai Friday that the yuan would at some point be included in the IMF's basket of Special Drawing Rights (SDR). "It's not a question of if - it's a question of when," she said during a question and answer session after a speech at Fudan, according to a Reuters report.

She said the yuan belongs in the SDR basket. Her comments raised expectations that the yuan might be included in the SDR basket this year.

SDR, created in 1969 by the IMF, is used as supplementary foreign exchange reserve assets. Allocated to nations by the IMF, an SDR represents a claim to foreign currencies for which it may be exchanged in times of need. The value of an SDR is calculated from a basket of currencies that is currently made up of the US dollar, euro, yen and pound sterling, with the US dollar accounting for most of the weight.

For years, China has been pushing for the yuan to be added to the SDR basket. The IMF reviews the currencies in the basket every five years. In its most recent review in 2010, the IMF once again refused the yuan because it was not "freely usable." Under IMF rules, a currency must be freely usable for it to be included in the SDR.

However, China has continued to make great efforts in recent years to make the yuan meet the IMF's criterion, because China can benefit a lot if the yuan is part of the SDR. First, it would encourage the internationalization of the yuan. Inclusion in the SDR would also show that the yuan has won official recognition as an international reserve currency. The yuan could then be more extensively used to settle payments and financial transactions.

Second, the inclusion of the yuan in the SDR would give China a more proportionate say over IMF policies because China's economic aggregate and its contribution to the world economy has grown significantly in recent years. Third, it would force China to accelerate its reforms and opening up of the financial sector so it falls in line with international standards.

For these reasons, China has a large incentive to get the yuan into the SDR basket. There is an increasingly burning desire for this due to the IMF's upcoming "five-year review." The IMF will hold discussions about the issue in May and make a decision in November, according to media reports.

China also has a lot more confidence as there is evidence that suggests the time is ripe for the yuan to be included in the SDR. To begin with, China's share of global exports has grown continuously since it overtook the US as the world's biggest exporter in 2007. Moreover, the yuan became the world's No.2 currency for trade finance globally in 2013, and overtook the Canadian and Australian dollars to become the fifth largest world payment currency in December, according to statistics from SWIFT, a global transaction services organization.

Besides, China has long been committed to widening the exchange rate band, accelerating the free convertibility of capital accounts and speeding up interest rate liberalization in recent years, with the aim of promoting the internationalization of the yuan.

There are still many obstacles to the yuan becoming part of the SDR. The biggest hurdle is that the yuan is still not freely usable. It seems unlikely that the IMF will overlook its own rules to accept the Chinese currency. What's more, it will not be easy for China to persuade the US to agree to add the yuan to the SDR basket, and the US has veto power over such major decisions.

The US remains ambivalent about the issue because it might not be good news for the US. It can't be denied that the US will to some extent think that adding the yuan to SDR will create a Sino-centric financial order that will challenge the Western-dominated Breton Woods institutions set up after World War II. In addition, there are still strict capital controls in China now, which remains an important technical obstacle.

But in the long term, the yuan's addition to the SDR basket is inevitable. In fact, adding the yuan to the SDR is conducive to promoting the reform of the international monetary system. Emerging countries have long complained that they have too little say at the IMF - which is dominated by developed countries. And a US dollar-dominated SDR is not conducive to the diversification of reserve assets, increasing risks of other countries due to the heavy reliance on the US dollar.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

    

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