China's yuan move to help it join IMF's elite forex club

The Pak Banker - - FRONT PAGE -

China's move to re­vamp its cur­rency regime this week may help the yuan earn a place in the small group of cur­ren­cies the In­ter­na­tional Mon­e­tary Fund uses as a global bench­mark, de­spite con­cerns the pol­icy change could be­gin a round of com­pet­i­tive de­val­u­a­tions.

Bei­jing de­scribed its sur­prise de­val­u­a­tion of the yuan's value as a one-off step to make the cur­rency more re­spon­sive to mar­ket forces, but some crit­ics saw it as a thinly veiled ef­fort to make China's ex­ports more com­pet­i­tive and boost eco­nomic growth.

If Bei­jing's word holds true, IMF and other fi­nan­cial of­fi­cials say, the move could bur­nish China's cam­paign to join the IMF's cur­rency bas­ket, known as Spe­cial Draw­ing Rights or SDR, which can be used to sup­ple­ment mem­ber coun­tries of­fi­cial re­serves.

It's a dis­tinc­tion long sought by Bei­jing, both to en­cour­age use of the yuan for trade and in­vest­ment, and as diplo­matic recog­ni­tion of China's grow­ing role in the world econ­omy. Fi­nance of­fi­cials, in­clud­ing of­fi­cials at the U.S. Trea­sury, be­lieve it is too early to say whether the de­val­u­a­tion is a move to more cur­rency flex­i­bil­ity or an ef­fort to gain a trade edge.

There is also worry that Chi­nese of­fi­cials may see more weak­ness in their econ­omy than they have dis­closed and are us­ing the de­val­u­a­tion to try to get ahead of up­com­ing prob­lems.

In a late-night state­ment on Tues­day, the IMF wel­comed China's move and said it ap­peared to be part of re­forms to let mar­ket forces play a big­ger role, some­thing the Fund and the United States have long pushed China to do.

"We be­lieve that China can, and should, aim to achieve an ef­fec­tively float­ing ex­change rate sys­tem within two to three years," it said.

"A more mar­ket-de­ter­mined ex­change rate would fa­cil­i­tate SDR oper­a­tions in case the ren­minbi were in­cluded in the cur­rency bas­ket go­ing for­ward," it added, us­ing an al­ter­na­tive name for the yuan. Join­ing the cur­rency bas­ket would put the yuan along­side the U.S. dol­lar, Bri­tish pound, euro and Ja­panese yen.

It would be the first emerg­ing mar­ket cur­rency to be in the SDR, mark­ing another stage in China's rise as a global eco­nomic player.

The IMF's board is sched­uled to meet in Novem­ber to de­cide whether to in­clude the yuan in the SDR bas­ket, which could then hap­pen in 2016 when China as­sumes the pres­i­dency of the Group of 20 club of rich and de­vel­op­ing na­tions.

The yuan is al­ready the world's fifth mos­tused trade cur­rency, but be­cause it is not con­sid­ered freely traded and China's cap­i­tal mar­kets are largely closed it has not qual­i­fied un­der the IMF's SDR cri­te­ria as "freely us­able."

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