by Lady Michelle Jennifer Santos
19 November 2015 (TSR) – IMF Chief Christine Lagarde and Fund Staff approved on Friday China’s renminbi to place the yuan on the elite basket of SDR currencies together with the U.S. dollar, Japanese, British pound and euro EUR= at a meeting scheduled for Nov. 30, Reuters reported.
The report by IMF staff finds that the renminbi “meets the requirements to be a ‘freely usable’ currency” or widely used for international transactions and widely traded in major foreign exchange markets and that it should be included in the elite currency basket, IMF chief Christine Lagarde said.
China has been diligently meeting the second criteria, which was the cause of the delay, and achieved remarkable progress in its push for the yuan’s globalization through the establishment of a scheme to expand cross-border trade settlements denominated in the currency, the launch of the Renminbi Qualified Foreign Institutional Investor program and the signing of currency swap agreements with numerous countries.
“In the paper, the IMF staff assessed that the RMB meets the requirements to be a ‘freely usable’ currency and, accordingly, the staff proposes that the Executive Board determine the RMB to be freely usable and include it in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the US dollar.
“The staff also finds that Chinese authorities have addressed all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July.
“I support the staff’s findings. The decision, of course, on whether the RMB should be included in the SDR basket rests with the IMF’s Executive Board,” IMF Chief Lagarde said.
China’s central bank, the People’s Bank of China, also issued a statement on November 14 on its website that welcomes the IMF’s announcement and appreciating the analysis of the IMF staff on including the RMB into the SDR currency basket, Xinhua reported.
“The inclusion of the RMB in the SDR basket would increase the representativeness and attractiveness of the SDR, and help improve the current international monetary system, which would benefit both China and the rest of the world,” the PBOC statement said.
China would respect the board’s decision and continue to deepen economic reforms, the PBOC added.
When the renminbi, or yuan, joins the IMF’s reserve basket, at least US$1 trillion of global reserves will be converted to Chinese assets.
The renminbi’s inclusion in the SDR basket will help spur China to accelerate financial reforms and economic opening up and catalyze yuan liberalization, according to the report.
The SDR is a supplementary foreign exchange reserve asset created by the IMF in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and the US dollar. A country participating in the system needed official reserves — defined as government or central bank holdings of gold and widely accepted foreign currencies — that could be used to purchase the domestic currency in foreign exchange markets as required to maintain its exchange rate, WantChinaTimes reported in October.
The equivalent of about US$280 billion in SDRs were created and allocated to IMF members as of September, compared with about US$11.3 trillion in global reserve assets, the report added.
Staff also gave the green light to Beijing’s efforts to address operational issues identified in a report in July, Lagarde said.
The executive board, which represents the Fund’s 188 members, is seen as unlikely to go against a staff recommendation and countries including France and Britain have already pledged their support for the change. This would take effect in October 2016, during China’s leadership of the Group of 20 bloc of advanced and emerging economies, Reuters reported.
The announcement also means the U.S. petro-dollar ceases its global hegemony.
