Delay Will Not Derail IMF’s RMB Yuan Internationalization

Delay Will Not Derail IMF’s RMB Yuan Internationalization

China’s currency RMB Yuan is very likely to be included in the benchmark currency basket of the International Monetary Fund (IMF) in its upcoming 5-year review, though the time frame for the process may be extended, a senior economist said on Wednesday.

“We still think it is highly likely that RMB will be included — though for technical reasons, the actual date of inclusion may be extended to 30 September 2016, to give reserve managers time to adjust,” Wang Tao, Chief China economist at UBS, said in a research note.

Every 5 years, the IMF reviews the status of currencies within its Special Drawing Rights (SDR) and opens up a window for inclusion of additional currencies.

Created in Y 1969, the SDR aims at supplementing IMF member countries’ official reserves.

Economists see RMB Yuan’s inclusion as a big step in the currency’s internationalization.

“The current SDR basket expires at the end of this year. We are proposing extending the current SDR basket by 9 months until September 30, 2016. This is in response to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year and facilitating continued smooth functioning of SDR-related operations,” noted a new IMF article, citing Siddharth Tiwari, Director of the IMF’s Strategy, Policy and Review Department.

“The proposed extension, which will be decided by the Executive Board later this month, would not in any way prejudge the timing of conclusion or outcome of the review,” he said.

“In fact, the IMF article implies a large likelihood of SDR inclusion — otherwise the technical preparation would not be necessary,” said Wang.

“We thought that RMB had a reasonably good chance of being included in the SDR basket soon, with approval in principle likely this year, and actual inclusion for technical reasons perhaps next year. It now seems that if approved this year, the actual technical inclusion would be by the end of September 2016,” added Wang, a former IMF economist.

IMF Managing Director Christine Lagarde has said the RMB’s inclusion in the SDR basket is not “a matter of if, but when.”

“We believe the RMB has a good chance of joining the benchmark currency basket of the IMF regardless if it happens this year or next,” HSBC said in a research note on Wednesday.

“We see the RMB being an outperformer among other major and emerging market currencies,” HSBC said.

The IMF’s Executive Board plans to formally review the possibility of adding RMB Yuan to the SDR basket by the end of this year, senior IMF officials said after some media had reported the global lender might delay including the RMB Yuan in the SDR basket till September 2016.

The international use of the RMB Yuan is vital for the IMF to decide whether the RMB is “freely usable,” an important criterion for admission into the SDR. At the last IMF review in Y 2010, the RMB Yuan met the criterion of a significant currency in terms of global trade, but was assessed as not meeting the “freely usable” requirement.

Stay tuned…

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Paul Ebeling

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