Yuan not yet ready to join elite currency basket, says IMF
THE yuan trails its global counterparts in major benchmarks and “significant work” in analysing data is needed before deciding whether to grant the Chinese currency reserve status, the International Monetary Fund (IMF) says.
IMF staff members have also opened the door to a possible delay in any approval with a proposal to postpone by nine months, until September next year, the implementation of a change in the basket of currencies that make up the lender’s Special Drawing Rights (SDRs), says its update on the five-yearly review, released on Tuesday.
The IMF said postponing the change would make the transition to a new basket smoother.
The report suggests while IMF board approval is not yet assured, it is within reach, and the decision will be based on more than the staff’s assessment.
China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket. Countries such as France have welcomed China’s push but the US has urged China to keep moving towards a flexible exchange rate and to persist with financial reforms.
“The ultimate assessment by the board will involve a significant element of judgment,” the IMF report says.
The postponement set the stage for the IMF to add the yuan to the SDR just before Chinese President Xi Jinping’s hosting of a Group of 20 (G-20) meeting next year, said David Loevinger, MD of emerging markets sovereign research at asset manager TCW in Los Angeles.
“The endgame is obvious,” said Mr Loevinger, former senior co-ordinator for China affairs at the US Treasury. “If the Chinese make this a priority, it’s pretty certain President Xi will have his deliverable at the G-20.”
The delay may buy China some time to implement reforms including opening up the capital market. Reforms have been complicated by efforts to stem a nearly $4-trillion stock rout.
The barrage of measures the government has taken include cutting interest rates to a record low and banning share sales by major investors.
“Lots of preparation needs to be done, especially in the front of managing risks,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse in Hong Kong. “If it’s not ready to open the capital account, it’d be better not to force it. Capital controls saved China in 1997, in 2008 and now.”
The report does not refer to the recent interventions to stem the equities slump. MD of the IMF Christine Lagarde said last week the interventions should not derail the SDR review.
The IMF’s executive board, which represents the fund’s 188 members, still planned to formally discuss the review towards the end of the year, Siddharth Tiwari, head of the IMF’s strategy, policy and review department, said. The proposed extension in implementation would be decided later this month and would not “in any way prejudge the timing of conclusion or outcome of the review”, he said.
“Time is still pressing,” said Ding Shuang, chief China economist at Standard Chartered in Hong Kong. “The technical delay proposal will not affect the review process, and (a) conclusion is still likely this year.”
That did not mean China had to implement every change this year, Mr Ding said. “The IMF board will make the decision to include the yuan if (all progress is) in line with expectations.”
The IMF said international use of the yuan, officially called the renminbi, had increased over the past five years, albeit from a low base. “Across a range of indi- cators, (it) is now exhibiting a significant degree of international use, especially in Asia and increasingly in Europe.”
But it trails other currencies in metrics the fund tracks in determining the SDR basket, the report says. To qualify for the basket, currencies must be “widely used” to make payments in global transactions, and be “widely traded” in major exchange markets. Key indicators include its share of official reserves, international banking liabilities and global debt securities, as well as the volume of use in foreign exchange markets.
Last year the yuan ranked seventh among currencies as a share of official reserves, behind the four SDR members and Australian and Canadian dollars, according to the IMF. The yuan constituted 1.1% of official reserves, compared with 63.7% for the US dollar.
The yuan also ranks outside the top five in terms of debt securities and currency trading.
Winning the IMF’s blessing, following a rejection in the last review in 2010, would give the yuan prestige as a reserve currency that makes it more attractive for central banks to hold and potentially reduces the dollar’s dominance. From a technical standpoint, owning SDRs counts towards a country’s official reserves; the US holds $50bn worth, out of $280bn allocated to IMF members worldwide.
Another wrinkle is that the IMF will assess whether yuan payments between the Chinese mainland and Hong Kong, Macau and Taiwan should be treated as international transactions, the report says.