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Lew: Yuan not ready for IMF blessing as reserve currency

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US Treasury Secretary Jacob J Lew said China needs to loosen its financial controls before the yuan can qualify to be included in the IMF's basket of reserve currencies.

[WASHINGTON] US Treasury Secretary Jacob J Lew said China needs to loosen its financial controls before the yuan can qualify to be included in the IMF's basket of reserve currencies.

Mr Lew urged China to ease restrictions on the flow of capital and the setting of interest rates to ensure the yuan is increasingly used as an international currency. China must implement the "necessary reforms" before it will meet the International Monetary Fund's standards for inclusion in the basket of currencies that determine the fund's Special Drawing Rights, Lew said in a speech Tuesday in San Francisco.

Countries including Germany and France have supported China's bid to be included in the basket, and IMF Managing Director Christine Lagarde has said the question is when, not if, the yuan qualifies. In late 2015, the IMF will complete its next twice-a-decade review of the basket of currencies that set the value of the SDR, which its members can count toward their official reserves.

"I hope that the timing here turns out to be a fortuitous one, where the fact that there's a periodic review by the IMF spurs the reforms to be implemented and completed," Mr Lew said.

The US is trying to strike a balance between welcoming China's efforts to more deeply integrate itself into the global economy, and pressing the Communist-led nation to speed reforms that would open it to more trade and investment.

Mr Lew said it's uncertain where China will end up on the spectrum from embracing the international economic order forged during the Second World War, or "starting with a blank slate and writing new rules." "As we engage with China about the right approach to high standards for the international financial system, neither the United States nor China can afford to walk away from the institutions that make up the international economic architecture," he said.

He spoke after a visit to Beijing this week to meet with top officials including Premier Li Keqiang and Vice Premier Wang Yang ahead of the US-China Strategic and Economic Dialogue, to be held in Washington later this year.

The IMF created the SDR in 1969 to support the Bretton Woods system of fixed exchange rates after supplies of gold and dollars proved inadequate. Owning SDRs gives countries a claim to the four currencies in the basket: the dollar, euro, yen and U.K. pound.

Mr Lew said financial reforms would leave China's economy more balanced.

"Internally it would be less dependent on investment and artificially low interest rates," he said. "Externally it would be less dependent on exports and an undervalued exchange rate." Getting China to intervene less in the yuan's rate remains at the top of the U.S.'s economic engagement with China, Lew said.

Mr Lew, 59, called wider international use of the yuan a "natural next step in the liberalization and reform" of the world's second-biggest economy.

Still, "China will need to successfully complete difficult fundamental reforms, such as capital-account liberalization, a more market-determined exchange rate, interest rate liberalization, as well as strengthening of financial regulation and supervision," he said.

There are signs that China has recently been intervening to prop up the yuan instead of weaken it, as the nation's economic growth slows and money flows out. The yuan is little changed against the dollar over the past year, while most currencies have fallen against the greenback.

BLOOMBERG