IMF decision on yuan 'politically motivated', says Mr Yen

Tokyo

THE International Monetary Fund's (IMF) decision to include China's renminbi (RMB) in the basket of key international currencies known as Special Drawing Rights or SDRs was "wrong" and was "politically motivated", Japan's "Mr Yen" and regional currency specialist Eisuke Sakakibara has charged.

"I don't know why they have included the RMB in the SDR basket," the former vice-finance minister for international affairs told The Business Times. "The RMB is different from the dollar, euro, yen or pound that make up the four existing member currencies."

The architect of the 1997 plan to create an Asian Monetary Fund challenged the IMF's decision to admit the RMB on the grounds that it is a "freely usable" currency. "It is not a freely exchangeable currency," Mr Sakakibara insisted.

"The yuan (RMB) will not become a global currency - no way," he said. And "it should not be treated as a reserve currency".

Mr Sakakibara's outspoken condemnation of the IMF move is at odds with the welcome from those who see it as a recognition of the RMB's rapidly-rising regional and international roles in trade and other financial transactions.

But some have given a more guarded reaction to the IMF move, made at the end of last month and which is due to take effect next October. "There has been a bit too much emphasis" on the elevation of the RMB to SDR status, former IMF deputy managing director Naoyuki Shinohara told BT. The SDR "has a very limited role".

In interviews with BT, current and former senior monetary officials expressed views for and against the IMF decision to include the RMB in its quasi international reserve currency - the SDR - a move that confers international recognition upon the Chinese currency.

Controversy revolves around whether the RMB should have qualified as a "freely usable" currency, one of the criteria that determine eligibility to be included in the SDR, a fiat currency which can be swapped for hard currencies and which could itself become a global reserve currency one day.

On Nov 30, IMF executive directors agreed that the RMB "can be considered in fact, widely used to make payments for international transactions (and) widely traded in principal exchange markets". From October 2016, they added, "the RMB is determined to be freely usable".

Some market players agreed. The "speed at which the RMB has reached major currency status on the global stage is unparallelled", said Darryl Hooker, co-head of money trading firm EBS BrokerTec Markets. "The RMB has surpassed the yen as the world's fourth-most-used payment currency."

But Mr Sakakibara insisted that "in order for the RMB to become an international or quasi-international currency, China's regulations on international finance need to be lifted". "As long as the authorities control the financial sector or the currency, the RMB could not become an international currency."

It will take "20 or 30 years" for China to reform its financial regulations, he suggested. It took Japan many years but "China is still a socialist country (and) many major financial institutions are still state institutions". "It will take a long time to completely deregulate interest rates and bank management and ownership."

"(China) has to become a market-based system. They are going in that direction but it will take a long time. Markets must be sure that the authorities do not intervene, except maybe in a crisis, with exchange controls or controls on financial transactions."

On the IMF decision, Mr Sakakibara noted that "China's share is increasing in the IMF and China's influence is increasing not only in the G-7 but also in the G-20". They "probably took that into account" in reaching a decision, he added.

Mr Shinohara agreed that "China needs to liberalise its domestic market". "Funds need to be able to flow freely and to have access to domestic markets. Capital flows are still very much controlled in China. Can (it) be a true reserve currency in those circumstances?"

SDR membership "helps promote acceptance of the RMB as a reserve currency", Asian Development Bank chief economist Shang Jin Wei told BT. "This will lead to an increase in international demand for RMB assets by central banks, sovereign wealth funds and other institutions. Willingness to settle trade or financial transactions in RMB will also go up."

In the short run, inclusion of the RMB in the SDR basket "has only symbolic meaning", said former senior ADB official and former dean of the Asian Development Bank Institute in Tokyo, Masahiro Kawai.

"Over time, however, central banks are expected to increase their holdings of the RMB as official foreign exchange reserves," he told BT. "More firms will use for trade and foreign direct investment settlements and more investors will use as store of value."

But, Mr Kawai added, "whether this decision will help to further internationalise the RMB in a substantial way depends upon how much and how fast the Chinese authorities are willing to liberalise exchange and capital controls in the onshore market".

Harvey Chen, head of the First Light Academy in Shanghai, and Yuqing Xing, a professor at the Graduate Research Institute for Policy Studies in Tokyo, told BT that inclusion of the RMB in the SDR is important in aiding China's financial stability while the country undergoes a major economic transition.

But it could limit Beijing's freedom of policy manoeuvre in the short term, where the RMB exchange rate is concerned, they added.