30/11/2015 08:34 AST
The International Monetary Fund is expected to approve inclusion of China’s yuan in its SDR basket of elite currencies on Monday, rewarding Beijing’s strong pursuit of the global status.
The IMF executive board is scheduled to meet on Monday to decide on the recommendation by staff experts earlier in November to include the yuan, also known as the renminbi, alongside the US dollar, euro, Japanese yen and British pound in the grouping. While not a freely traded currency, the SDR (special drawing right) is important as an international reserve asset, and because the IMF issues its crisis loans — crucial to struggling economies like Greece — valued in SDRs.
China, now the world’s second-largest economy, asked last year for the yuan to be added to the grouping of world reserve currencies, but until recently it was considered too tightly controlled to qualify. It is extremely rare that the executive board, which represents the IMF’s 188 member nations, opposes the recommendation of its own experts. IMF Managing Director Christine Lagarde said in mid-November that she supported the experts’ finding that the yuan had met the requirements to be a ‘freely usable’ currency” — a key hurdle for SDR status.
If accepted, the decision would not take effect before September 30, 2016, to allow users more time to prepare. The last time the SDR basket was modified was in 2000, when the euro replaced the German deutschemark and the French franc.
The remaining question is the yuan’s weight in the basket. It could be 10 per cent to 16 per cent, but the lower estimate is more likely due to the Chinese currency’s limited convertibility. The basket composition is reviewed every five years. At the last rebalancing in 2010, the dollar accounted for 41.9 per cent, the euro 37.4 per cent, the pound 11.3 per cent and the yen 9.4 per cent.
That weighting revision was based on the value of the exports of goods and services by country or currency zone, and the amount of reserves denominated in the respective currencies held by other IMF members.
Diplomatic success: The entry of the yuan is, above all, a major diplomatic success for Beijing, which will see its money graduate to the inner circle of the world’s most important currencies.
The vote of the United States, the largest IMF stakeholder, will be closely watched, as will US political reactions. US officials have long accused China of keeping the yuan artificially low to gain a trade advantage, making its exports relatively cheaper.
The US Treasury Department, in an October 19 report, said that the yuan “remains below its appropriate medium-term valuation.”
Paradoxically, China’s unexpected devaluation of the yuan last August received good marks from the IMF because it reinforced the currency’s movements with market forces and opened the door to future revaluation.
Oman Daily Observer
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