IMF poised to put yuan in elite cur­rency bas­ket

Kuwait Times - - BUSINESS -

WASH­ING­TON: The In­ter­na­tional Mon­e­tary Fund is ex­pected to ap­prove in­clu­sion of China’s yuan in its SDR bas­ket of elite cur­ren­cies to­day, re­ward­ing Beijing’s strong pur­suit of the global sta­tus.

The IMF ex­ec­u­tive board is sched­uled to meet to­day to de­cide on the rec­om­men­da­tion by staff ex­perts ear­lier in Novem­ber to in­clude the yuan, also known as the ren­minbi, along­side the US dol­lar, euro, Ja­panese yen and Bri­tish pound in the group­ing. While not a freely traded cur­rency, the SDR (spe­cial draw­ing right) is im­por­tant as an in­ter­na­tional re­serve as­set, and be­cause the IMF is­sues its cri­sis loans-cru­cial to strug­gling economies like Greece­val­ued in SDRs.

China, now the world’s sec­ond-largest econ­omy, asked last year for the yuan to be added to the group­ing of world re­serve cur­ren­cies, but un­til re­cently it was con­sid­ered too tightly con­trolled to qual­ify. It is ex­tremely rare that the ex­ec­u­tive board, which rep­re­sents the IMF’s 188 mem­ber na­tions, op­poses the rec­om­men­da­tion of its own ex­perts. IMF Man­ag­ing Di­rec­tor Christine Lagarde said in mid-Novem­ber that she sup­ported the ex­perts’ find­ing that the yuan had met the re­quire­ments to be a ‘freely us­able’ cur­rency”-a key hur­dle for SDR sta­tus.

If ac­cepted, the de­ci­sion would not take ef­fect be­fore Septem­ber 30, 2016, to al­low users more time to pre­pare. The last time the SDR bas­ket was mod­i­fied was in 2000, when the euro re­placed the Ger­man deutschemark and the French franc. The re­main­ing ques­tion is the yuan’s weight in the bas­ket. It could be 10 per­cent to 16 per­cent, but the lower es­ti­mate is more likely due to the Chi­nese cur­rency’s lim­ited con­vert­ibil­ity.

The bas­ket com­po­si­tion is re­viewed ev­ery five years. At the last re­bal­anc­ing in 2010, the dol­lar ac­counted for 41.9 per­cent, the euro 37.4 per­cent, the pound 11.3 per­cent and the yen 9.4 per­cent.

That weight­ing re­vi­sion was based on the value of the ex­ports of goods and ser­vices by coun­try or cur­rency zone, and the amount of re­serves de­nom­i­nated in the re­spec­tive cur­ren­cies held by other IMF mem­bers.

Diplo­matic suc­cess

The en­try of the yuan is, above all, a ma­jor diplo­matic suc­cess for Beijing, which will see its money graduate to the in­ner cir­cle of the world’s most im­por­tant cur­ren­cies. The vote of the United States, the largest IMF stake­holder, will be closely watched, as will US po­lit­i­cal re­ac­tions. US of­fi­cials have long ac­cused China of keep­ing the yuan ar­ti­fi­cially low to gain a trade ad­van­tage, making its ex­ports rel­a­tively cheaper.

The US Trea­sury Depart­ment, in an Oc­to­ber 19 re­port, said that the yuan “re­mains be­low its ap­pro­pri­ate medi­umterm val­u­a­tion.” Para­dox­i­cally, China’s un­ex­pected devaluation of the yuan last Au­gust re­ceived good marks from the IMF be­cause it re­in­forced the cur­rency’s move­ments with mar­ket forces and opened the door to fu­ture reval­u­a­tion.

Beijing on Wed­nes­day an­nounced an ini­tial group of for­eign cen­tral banks has been al­lowed to en­ter the Chi­nese cur­rency mar­ket, which likely will pro­mote fur­ther in­ter­na­tion­al­iza­tion of the yuan in global trad­ing. Credit rat­ing firm Fitch says it does not ex­pect the yuan’s in­clu­sion in the IMF bas­ket “to lead to a ma­te­rial shift in de­mand for ren­minbi as­sets glob­ally in the short term.” How­ever, it said, over time the emer­gence of the yuan as a global re­serve cur­rency could sup­port China’s credit rat­ing.

An IMF de­ci­sion to in­clude the yuan among its elite cur­ren­cies risks an­ger­ing some law­mak­ers in the US Congress amid fierce ma­neu­ver­ing for the 2016 pres­i­den­tial elec­tion. Congress, for ex­am­ple, has re­peat­edly re­fused to rat­ify a 2010 IMF re­form that would give greater weight to the emerg­ing-mar­ket pow­ers, the so-called BRICS - Brazil, Rus­sia, In­dia, China and South Africa. —AFP

SCH­LITZ: Tim­ber-framed build­ings are il­lu­mi­nated in front of a tower setup as a gi­ant can­dle in Sch­litz, Ger­many on Satur­day. The 36 me­ter (118 ft) high tower is the main at­trac­tion of the Christ­mas mar­ket in the town of Sch­litz in the Ger­man state of Hesse. —AP

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