IMF inclusion of yuan as SDR unit draws mixed reaction

Tokyo

MONDAY'S decision by the International Monetary (IMF) fund to admit the Chinese renminbi (RMB) to the basket of leading international currencies making up the IMF's special reserve unit known as Special Drawing Rights (SDRs) was greeted with mixed reactions on Tuesday.

Some experts said the move, which takes effect from next October, marks an important step along the road toward full internationalisation of the Chinese currency, but others said it could crimp China's freedom of monetary policy action at a time when its economic slowdown calls for flexibility.

China surprised markets several months ago when it suddenly devalued the RMB (also known as the yuan) under a slew of reforms designed to bring about a more market-determined exchange rate. Since then, Beijing has appeared to support the RMB in the runup to the IMF's decision.

Tim Adams, president and chief executive of the Washington-based Institute of International Finance (IIF), an influential voice in global finance, told The Business Times on Tuesday: "This is a big win for Beijing as they look to further internationalise the renminbi."

The former undersecretary for international affairs at the US Treasury added: "Now, China watchers will focus on officials' continued efforts to reform the (Chinese) economy."

But Yuqing Xing, a China expert and economics professor at the Graduate Research Institute of Policy Studies (GRIPS) in Tokyo, told BT that the SDR status of the RMB is purely symbolic and helps little in the internationalisation of yuan, which will be eventually determined by market forces.

The IMF's eagerly awaited decision on the RMB came in the early hours of Tuesday in many Asian capitals. The currency market reaction was muted, and the Chinese currency itself, virtually unchanged.

The currency will, from October 2016, join the four major international reserve currencies - the dollar, euro, yen and pound - in the SDR, which is not itself a reserve currency but a composite unit representing the value of the basket, and which can be swapped by IMF member countries for hard currencies.

China attaches great importance to the fact that the inclusion of the RMB in the SDR basket acknowledged its status as a "freely usable" currency, and marks a step toward its acceptance as an international reserve currency in its own right, analysts said.

This would, in time, enable China and other countries to reduce their reliance on the dollar, by far the world's leading global reserve currency; this dependence has left China and others feeling vulnerable in the wake of the global financial crisis in 2008.

The IMF said in a statement after the decision to include the RMB was made known: "A key focus of the executive board review was whether the renminbi met the existing criteria to be included in the basket. The board decided that the RMB met all existing criteria and, effective Oct 1, 2016, the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the dollar, euro, yen and the pound."

Launching the new SDR basket on Oct 1, 2016 will provide sufficient lead time for the IMF, its members and other SDR users to adjust to these changes, the IMF added.

Meanwhile, IMF managing director Christine Lagarde described the decision to include the RMB as "an important milestone in the integration of the Chinese economy into the global financial system".

"It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems.

"Continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy."

Mr Xing at GRIPS said the development boosts the confidence of the Chinese government, which firmly believes that political moves such as the endorsement of the IMF are necessary on the way toward the yuan's internationalisation.

"The inclusion of the yuan in the SDR basket may create an illusion that it has turned into an international currency like others in the basket," he said, adding that the currency was overvalued either in absolute or purchasing power parity terms.

With the yuan's accession to the SDR, the Chinese authorities will have less ability to let the yuan follow market forces and depreciate, he added.

The Monetary Authority of Singapore welcomed the development on Tuesday, saying: "This is a momentous and positive development for the international monetary system and reflects the growing use of the RMB as an international payments currency for trade and investment. MAS has worked closely with the People's Bank of China on initiatives to promote greater use of the RMB in Singapore and the South-east Asian region, and we look forward to further strengthening cooperation in the coming years to help foster a resilient and thriving RMB ecosystem in the region."

Japanese Finance Minister Taro Aso was among those who also welcomed the IMF's decision.

Darryl Hooker, co-head of EBS BrokerTec Markets, a leading electronic trading platform, described the IMF's decision as a key milestone in the internationalisation of the yuan: "The speed at which the renminbi has reached major currency status on the global stage has been unparalleled."

Meanwhile, the global transaction services organisation SWIFT said China's yuan has become the second-most used currency for payments between Japan and China plus Hong Kong, behind only the Japanese yen.

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