BOFIT Weekly Review 2015/47
IMF head calls for including yuan in SDR basket
IMF managing director Christine Lagarde last week declared her support for including the yuan in the Fund’s Special Drawing Rights (SDR) basket. Lagarde’s comments lean on the recommendations of the background report by the IMF experts. In their view, the yuan now meets all the criteria for inclusion in the SDR basket. The IMF board will meet on November 30 to decide on whether to include the yuan in the SDR basket. If they give the green light, technicalities still prohibit the yuan’s SDR linkage before October 2016 at the earliest.
The decision hinges on the free usability of yuan. China in recent months has rapidly dismantled currency controls and deregulated its financial and forex markets to meet IMF criteria. The IMF notes that now Chinese officials have eliminated remaining operational barriers to wider use of the yuan. The yuan already met the IMF “major exporter” criterion in the last quinquennial review of SDR; i.e. the size of China’s export share in global commerce was already sufficient.
As the fifth SDR currency, the yuan would be on par with the US dollar, euro, British pound and Japanese yen, and thereby signal the heightened role of China in the global economy. How the IMF decision affects international acceptance of the yuan will depend on how other actors perceive China’s and the yuan’s development. While becoming an SDR currency is unlikely to have much immediate economic impact, the decision supports China’s reform policies and increased use of the yuan over the long term. Since joining the WTO, China has demonstrated that it can follow international trade rules. It is hard to imagine that China would want perception of the yuan in a worse light than other major currencies.
While the trend to greater international use of the yuan is unquestionable, the transition to the new operating environment is unlikely to be straightforward or free of setbacks. This week the People’s Bank of China instructed clearing banks abroad (window guidance) to limit the capital exports from China. The measure helps to support the yuan’s exchange rate ahead of the IMF’s SDR decision.