RMB Yuan Set For Inclusion In IMF’s SDR Basket
The Chinese currency, the RMB Yuan, is set to advance its status as a Key international reserve currency as it is now a prime candidate for the IMF’s special drawing rights (SDR).
In a display of support, IMF Chief Christine Lagarde said in March that the Yuan’s inclusion in the SDR basket is “not a matter of if, but when” — this year or in Y 2020, when the IMF will again review the SDR basket.
Given the yuan’s greater role in the international monetary system, recent achievements as well as potential for future development, there is no reason to put it off.
The SDR was created in the 1960’s as an international reserve asset that IMF members can claim in times of need. Currently, there are only 4 currencies in the SDR basket, the US, EUR, GBP and JPY.
The IMF rejected the yuan in 2010 on the grounds that the currency was not “freely usable.” Since then, China has stepped up efforts to increase the currency’s global acceptance by allowing overseas investors to trade Shanghai-listed yuan-denominated shares, giving overseas funds expanded access to Chinese stocks and bonds, creating bilateral currency swaps and expanding trade settlement in the currency.
As a result, global use of the Yuan has been on the rise.
It overtook EUR in Y 2013 to become the world’s 2nd-most used currency in trade finance and was the 5th most popular currency in global payments in May, behind the USD, the Euro, the GBP and the JPY. It has also been used as a reserve currency in some countries.
In terms of trade settlement, the yuan has made great strides. In Y 2010, Yuan-denominated settlement accounted for about 7% of China-related foreign trade, compared with 22% in Y 2014 and an estimate of 30% this year.
More measures to promote global use of the Yuan are in the pipeline, including opening channels for Chinese individuals to invest overseas and easier access for overseas institutional investors to invest in the domestic capital market.
As it stands, adding the Yuan to the SDR basket will be a positive step to reform the international monetary system to reflect the increasing weight of major emerging markets in global trade and finance. It will help realize the IMF’s goal to include multiple currencies in the foreign reserves, dilute over-dependence on the USD and make the international monetary system more stable.
The IMF is expected to vote on the Yuan’s inclusion late this year.
China’s financial sector is opening-up, a boon for the rest of the world, and will continue regardless of the IMF’s RMB Yuan decision.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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