China is lobbying hard to get the International Monetary Fund to make the yuan a part of its currency basket. “China’s yuan is close to being a freely usable currency, one of two key tests for it to be included in the International Monetary Fund’s currency basket. …The most widely used emerging market currencies should be considered for the basket, Yi Gang, deputy governor of the People’s Bank of China told Reuters on Sunday.
Although not full convertible, Mr. Yi pointed out that China is a major exporter, which satisfy’s the second criteria for a currency to be included in the SDR basket. The SDR now comprises the dollar, euro, yen and sterling and is a synthetic quasi-currency that is mainly used as an accounting tool for the IMF’s internal operations.
Expanding the SDR basket would help support global growth, reduce imbalances and provide a financial safety net during times of financial troubles, Yi said, adding it would also make the international monetary system more representative.
The IMF completed its latest SDR review in November last year and did not open it up to any new currencies. It said the Chinese yuan was not used widely enough be to included in the SDR basket. However, The IMF is due to conduct its next review in 2015. Some analysts, such as Jim O’Neill, chairman of Goldman Sachs Asset Management, speculated that the IMF might not wait until then to change the SDR’s make-up.
China has been strongly cajoling the international community to make the Yuan a part of the IMF’s special drawing rights, in a bit to relieve the US dollar of being the global currency it is today. Backed by intense trade from China, the yuan is already the chosen currency when it comes to regional trade. In November 2010, Russia and China had agreed to use their currencies in bilateral trade. During the BRICS summit held last week, China urged the BRICS’ development banks to in principal establish mutual credit lines denominated in their currencies, not dollars, to strengthen business and trade ties. According to the China Daily, “BRICS economies hold 40 percent of the world’s currency reserves, the majority of which is still denominated in US dollars”.
While this is expected to take time, gain approval from each of the five nations development banks and be supported by their central banking regulations, China has promoted the international use of the yuan in the past two years, highlighted by the rapid development of the Hong Kong offshore yuan market. Earlier this year, state-owned Bank of China Ltd. offered yuan trading to its U.S. customers.
However much China might currently push for the internationalization of the people’s currency, or renminbi as its referred to in Mandarin, the first world powers that determine which currencies make the cut are demanding significant changes to the yuan before they consider including it in the IMF’s SDR. China’s government, which is promoting the internationalization of the yuan, has shied away from the idea because of concerns that might involve bigger, faster changes than it wants to make.
Former U.S. Treasury Secretary (July 2006 to January 2009) Henry Paulson, speaking to a small group of reporters on Friday, said, “To me a reserve currency has got to be one that is liquid and is convertible and whose value is determined by the markets, not by governments.” The U.S. dollar “is a reserve currency because it’s earned that over many many years [of] stable macroeconomic policies…[With] the renminbi, there will need to be more reform, and [it will need to] earn that reserve-currency status over time.”
“And I see that very similarly with the SDRs. I mean, how do you have a currency in the SDR that’s not market-determined but determined by a government?”