IMF poised to add yuan to elite currency basket today

WASHINGTON — The International Monetary Fund (IMF) is expected to approve inclusion of China’s yuan in its Special Drawing Right (SDR) basket of elite currencies today, rewarding Beijing’s strong pursuit of the global status.

The IMF executive board is scheduled to meet today to decide on the recommendation by staff experts earlier in November to include the yuan, also known as the renminbi, alongside the US dollar, euro, Japanese yen and British pound in the grouping.

While not a freely traded currency, the SDR is important as an international reserve asset, and because the IMF issues its crisis loans — crucial to struggling economies such as Greece — valued in SDRs.

China, now the world’s second-largest economy, asked last year for the yuan to be added to the grouping of world reserve currencies, but until recently it was considered too tightly controlled to qualify.

If accepted, the decision would not take effect before Sept 30, 2016, to allow users more time to prepare. The last time the SDR basket was modified was in 2000, when the euro replaced the German deutsche mark and the French franc.

The remaining question is the yuan’s weight in the basket. It could be 10 per cent to 16 per cent, but the lower estimate is more likely due to the Chinese currency’s limited convertibility.

The basket composition is reviewed every five years. At the last rebalancing in 2010, the US dollar accounted for 41.9 per cent, the euro 37.4 per cent, the pound 11.3 per cent and the yen 9.4 per cent.

That weighting revision was based on the value of the exports of goods and services by country or currency zone, and the amount of reserves denominated in the respective currencies held by other IMF members.

The vote of the United States, the largest IMF stakeholder, will be closely watched, as will US political reactions. US officials have long accused China of keeping the yuan artificially low to gain a trade advantage, making its exports relatively cheaper.

In an Oct 19 report, the US Treasury Department said that the yuan “remains below its appropriate medium-term valuation.”

Paradoxically, China’s unexpected devaluation of the yuan last August received good marks from the IMF because it reinforced the currency’s movements with market forces and opened the door to future revaluation. AFP