The Hindu

China’s yuan takes another step towards SDR basket inclusion

IMF staff on Saturday recommende­d that the currency be included in the IMF’s benchmark foreign exchange basket, a move that will indirectly benefit India as well

- TCA SHARAD RAGHAVAN — FILE PHOTO: AFP

China’s currency, the yuan, took another step forward towards joining the elite group of global reserve currencies on Saturday when the Internatio­nal Monetary Fund’s (IMF) staff on Saturday recommende­d that the Chinese currency be included in the IMF’s benchmark foreign exchange basket, a move that will indirectly benefit India as well.

Managing Director of the IMF Christine Lagarde also endorsed the yuan’s inclusion in the IMF’s Special Drawing Rights basket.

“The staff of the IMF has today issued a paper to the Executive Board on the quinquenni­al review of the SDR (Special Drawing Rights). A key focus of the Board review is whether the Chinese renminbi (RMB)… also meets the other existing criterion, that the currency be ‘freely usable’, which is defined as being ‘widely used’ for internatio­nal transactio­ns and ‘widely traded’ in the principal foreign exchange markets,” Ms. Lagarde said in a statement.

Ms. Lagarde also added that she supported the staff’s findings that the Chinese currency meets these criteria and should be included in the SDR basket. However, she admitted that the final decision rests with the IMF’s Executive Board. “I will chair a meeting of the Board to consider the issue on November 30,” she said. The yuan had failed to meet the ‘freely usable’ criterion the last time it was assessed, in 2010.

SDR are not a currency themselves, but are a certain number of rights given by the IMF to countries who, in a crisis, can draw upon any of the reserve currencies in the basket — currently the dollar, euro, yen and pound.

The inclusion of the yuan in this basket has been endorsed by almost all of the major economies of the world, including Germany, Britain, France and Italy. The U.S. was historical­ly cautious about this, but recently softened its stance in September when President Obama said the U.S. would support China’s bid for inclusion in the SDR basket as long as it met the IMF’s technical specificat­ions, which it now has.

While the IMF’s Executive Board has the final say in deciding whether the yuan joins the basket of reserve currencies, the matter is not yet certain. Complicati­ng the issue is the fact that the U.S. Congress has been stymieing reforms that would increase China’s voting powers at the IMF.

At the moment, China has less than 4 per cent of the voting power in the IMF, just a little more than Italy, which has an economy around one-fifth the size of China’s. Whether this lower voting power affects the decision on November 30 is yet to be seen.

Adding the yuan to the SDR basket will be a significan­t victory for China, Chief Economic Advisor Arvind Subramania­n told

The Hindu, adding that India will indirectly benefit from this.

“The yuan’s inclusion in the SDR basket, when it happens, will be a great victory for China. It will mean a global economic coming of age for them, and will mean that the yuan is now a reserve currency for the world and all that entails,” Mr. Subramania­n said.

However, to meet the various requiremen­ts to achieve this, China has had to open up its closed capital account, he added, saying that this is ‘unambiguou­sly a good thing’ for India.

“The ability of China to manipulate its exchange rate has become more restricted. Not only did India have to deal with China’s over-capacity, but also its devalued currency,” he said, adding that the latter will be less of a problem once the yuan enters the SDR basket.

 ??  ?? The inclusion of Yuan in the SDR basket has been endorsed by almost all of the major economies of the world, including Germany, Britain, France and Italy.
The inclusion of Yuan in the SDR basket has been endorsed by almost all of the major economies of the world, including Germany, Britain, France and Italy.
 ?? CHRISTINE LAGARDE,
IMF CHIEF ??
CHRISTINE LAGARDE, IMF CHIEF

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