IMF to de­lay adding China to cur­rency bas­ket

The Pak Banker - - FRONT PAGE -

The In­ter­na­tional Mon­e­tary Fund should put off any move to add the yuan to its bench­mark cur­rency bas­ket un­til af­ter Septem­ber 2016, IMF staff said in a re­port which showed a mixed per­for­mance of the ren­minbi on meet­ing key fi­nan­cial norms. The re­port comes af­ter Bei­jing launched a ma­jor diplo­matic push for the yuan to be added to the IMF's Spe­cial Draw­ing Rights bas­ket as part of its long-term strate­gic goal of re­duc­ing de­pen­dence on the dol­lar.

The IMF board is sched­uled to make a de­ci­sion in Novem­ber on whether to in­clude the yuan in a bas­ket of cur­ren­cies com­pris­ing dol­lars, eu­ros, pounds and yen, although the de­ci­sion could be pushed back if pol­i­cy­mak­ers de­cide they need more in­for­ma­tion.

De­lay­ing any change in the bas­ket for nine months through Septem­ber 2016 would avoid dis­rupt­ing fi­nan­cial mar­ket trad­ing on the first day of the new year, the staff re­port said. A se­nior IMF of­fi­cial said re­serve as­set man­agers would need about six months no­tice to ad­just to a change.

The yuan, also known as the ren­minbi, meets the re­quire­ments as a sig­nif­i­cant cur­rency in terms of in­ter­na­tional trade, but also has to be judged to be "freely us­able", or widely used to make in­ter­na­tional pay­ments and read­ily traded on for­eign ex­change mar­kets.

The re­port shows a mixed per­form- ance on fi­nan­cial cri­te­ria. Although the cur­rency is in­creas­ingly used in cross-bor­der trans­ac­tions and heav­ily traded in Asia, it is only thinly traded in North Amer­ica and is not com­monly used in in­ter­na­tional debt se­cu­ri­ties. Data was miss­ing for some vari­ables, the re­port said.

The se­nior IMF of­fi­cial said there was no set check­list of in­di­ca­tors to guide the de­ci­sion and no "off-on" switch on whether the yuan would make the grade at the planned re­view.

But he said pol­i­tics would play no role in the de­ci­sion, which will gov­ern the mix of cur­ren­cies that coun­tries like Greece re­ceive as part of dis­burse­ments from the IMF. "They should be able to use it di­rectly or they should be able to sell it im­me­di­ately," the of­fi­cial said.

An­a­lysts in­ter­preted the IMF de­lay dif­fer­ently, with some in­fer­ring the IMF wanted to see a more freely traded yuan be­fore in­clud­ing it as a re­serve cur­rency. Oth­ers said the de­lay seemed tech­ni­cal, aimed at giv­ing the mar­ket more time to pre­pare. "The IMF ar­ti­cle im­plies a large like­li­hood of SDR in­clu­sion - oth­er­wise the tech­ni­cal prepa­ra­tion would not be nec­es­sary," UBS economist Wang Tao said in a note to clients.

IMF Man­ag­ing Di­rec­tor Chris­tine La­garde has said adding the yuan to the bas­ket is a "ques­tion of when".

Euro­pean mem­bers of the Group of Seven ma­jor in­dus­tri­al­ized economies - Ger­many, Bri­tain, France and Italy - fa­vor adding the yuan to the bas­ket quickly. Ja­pan, like the United States, is more cau­tious, of­fi­cials have said.

The yuan has made huge strides since Bei­jing's last push for more for­mal in­ter­na­tional recog­ni­tion of the cur­rency, as global fi­nan­cial lead­ers were strug­gling to deal with the fall­out of the sub-prime and bank­ing cri­sis.

Chi­nese Premier Li Ke­qiang in March asked La­garde to push for in­clu­sion, say­ing Bei­jing would speed up the con­vert­ibil­ity of the yuan on the cap­i­tal ac­count and open do­mes­tic in­di­vid­ual cross-bor­der in­vest­ment and for­eign in­sti­tu­tional in­vest­ment in China's cap­i­tal mar­ket.

Ear­lier this year, frus­trated by the re­fusal of the U.S. Congress to pass re­forms to in­crease the vot­ing rights of emerg­ing mar­kets in the IMF, Bei­jing an­nounced it would set up its own in­vest­ment bank, the Asian In­fra­struc­ture In­vest­ment Bank.

De­spite pres­sure from Washington, which along with Tokyo, has de­clined to join the AIIB, most U.S. al­lies in Europe have signed up for the Chi­nese-led ini­tia­tive, seen as a ri­val to the World Bank and Ja­pan-based Asian De­vel­op­ment Bank.

Sid­dharth Ti­wari, di­rec­tor of the IMF's strat­egy, pol­icy and re­view depart­ment, said in a doc­u­ment re­leased with the re­port on Tues­day that the IMF ex­ec­u­tive board would de­cide on the ex­ten­sion pro­posal later this month.

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