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IMF set for lively debate this year on adding yuan to SDR basket

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China is expected to make another push for the inclusion of the yuan in the International Monetary Fund's in-house currency basket in a review later this year - and this time round its G20 partners may be willing to listen.

[LONDON] China is expected to make another push for the inclusion of the yuan in the International Monetary Fund's in-house currency basket in a review later this year - and this time round its G20 partners may be willing to listen.

US officials say they will wait for an IMF paper on the issue later this year before taking a view, but officials in Asian and other G20 capitals say that, unlike in the review five years ago, the issue will at least be a live discussion.

The yuan, or renminbi, has made huge strides since Beijing's last push for more formal international recognition of the currency as global financial leaders were struggling to deal with the fallout of the sub-prime and banking crisis.

The chief argument against its inclusion then in the Special Drawing Rights, a basket of yen, dollars, pounds and euro used as the IMF's in-house unit of account, was that the renminbi was far from freely "usable" or convertible.

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That argument is gradually weakening as yuan offshore trading surges. This month leading currency platform EBS ranked it in its top five most traded currencies.

One Asian G20 source said it would be welcomed by those like South Korea as an encouragement for more investment generally in China. But the source said any decision was likely to be a roadmap rather than a cut-and-dried adoption of the yuan.

"I think this could well be the year the yuan is included," said a senior official at an Asian central bank.

The first step in the review of the basket is an informal board meeting in May, followed by a formal review in the autumn. Any changes would come into effect in January 2016 but would require a 70 or 85 per cent majority on the IMF council.

Either way, officials say US support will be crucial.

Harvard University professor Jeffrey Frankel said it was premature to consider the yuan "freely usable" but there may be other political reasons for a change this year.

The Group of 20 major governments agreed in 2010 to give China and other emerging markets a greater say at the IMF, while reducing the dominance of Western Europe on its board. But those changes have not been ratified by the US Congress.

"I think it is important to acknowledge the rise of China, and let them have a fair, proportionate weight in institutions like the IMF," Mr Frankel said.

"If I were at the top of the IMF or the White House, I might feel that since China cannot be accommodated (with quotas) then we have to accommodate them in this other way (through SDRs), which after all won't do any harm."

While China has long met conditions on its exports forming a large enough percentage of global trade, the debate is likely to centre on its capital markets.

Although still tightly government-controlled, offshore yuan trading soared some 350 per cent on Thomson Reuters trading platforms last year.

Ten nations now buy Chinese assets via its "RQFII" scheme, 14 countries have yuan clearing arrangements, and 28 other central banks have currency swap lines with China.

But David Dollar, a former US Treasury attaché in China now with the Brookings Institution think-tank in Washington, still had his doubts.

"My sense is at the moment, the yuan is not freely usable," he said. "A big asset management firm can't just suddenly decide to take a big position in Chinese yuan, and buy Chinese government bonds. That's all highly restricted."

Nevertheless, the yuan has jumped to the top of the list of priorities for those running market operations at the world's big banks, and London, the world's main currency trading centre, is clearly enthusiastic.

"China's commitment since 2013 has been to head for a managed float and it is going to be one of the significant trading currencies," said Simon Derrick, head of global research at Bank of New York Mellon in London. "So why wouldn't it be included in the SDR and why not in central bank reserves?"

REUTERS

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