Yuan still in play for SDR inclusion

A clerk counts yuan bills at a bank in Huaibei, East China's Anhui province. [Photo/IC]

Review on addition of Chinese currency underway, says IMF

The International Monetary Fund said on Wednesday that the review on the inclusion of the yuan in its basket of Special Drawing Rights reserve currency is "well underway' and the formal discussions will take place toward the end of the year.

Siddharth Tiwari, director of the IMF's Strategy, Policy, and Review Department, confirmed that the review schedule has not yet changed despite an IMF staff paper proposing the extension of the current SDR basket by nine months until Sept 30, 2016.

The current SDR basket, which includes US dollar, British pound, euro and Japanese yen, is reviewed every five years.

The extension was mentioned as the SDR users may need time to adjust to a potential changed basket composition, or "for technical reasons", should the executive board decide to include the yuan, said the official.

Wang Tao, chief economist in China at Swiss financial services provider UBS AG, said: "It implies a large likelihood of the yuan's SDR inclusion－otherwise the technical preparation would not be necessary."

But some foreign and Chinese media interpreted that the proposed extension means a possible delay in the yuan's SDR inclusion.

Influenced by the interpretation, the yuan-to-US dollar exchange rate reached a one-month low earlier on Wednesday, and its central parity rate set by the central bank declined to a two-week low of 6.1186.

"We think there is a misinterpretation of the IMF statement," said Wang. "The proposed extension was to give member countries more time to adjust their holdings, not to give China more time to meet the criteria."

Becky Liu, a Standard Chartered Plc strategist, said: "It shows that the fund is preparing for the possibility that the yuan will be included in the SDR this time around".

In a report released on Tuesday, the IMF said at the time of the last review in 2010, China met the gateway export criterion, meaning the use of yuan, in international trade, but the currency was not included in the SDR basket as it was not judged to be freely usable, the second currency selection criterion.

The report said that across a range of indicators, the yuan is now exhibiting a significant degree of international use and trading.

The IMF official Tiwari said the yuan is the only currency not currently in the SDR basket that meets the export criterion. Therefore, a key focus of the current review will be whether the yuan also meets the freely usable criterion in order to be included in the SDR basket.

Historically, decisions that have changed the valuation method have been taken with a 70 percent majority.

Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution, said the IMF's review indicates that China has made significant progress on meeting the "freely usable" criterion for the yuan to be included in the SDR basket but that more progress is needed.

"The decision about the yuan's inclusion in the basket hinges on reforms such as greater exchange rate flexibility, more investor access to onshore foreign exchange and securities markets, and availability of a wider range of government debt securities," said Prasad, a former IMF China division chief.

He said IMF staff have also signaled that the yuan's inclusion in the SDR basket will ultimately be a matter of judgment by the IMF executive board since the decision falls right at the margin.