Yuan Set to Join IMF Basket in Step Toward Currency Big Leagues

China’s yuan is poised to enter the big leagues of global currencies, according to the judgment of the International Monetary Fund.

IMF staff have recommended the yuan be included in the fund’s Special Drawing Rights reserve-currency basket, alongside the U.S. dollar, euro, pound and yen, IMF Managing Director Christine Lagarde said Friday. The staff nod makes approval by the fund’s board this month all but certain, as major IMF shareholders including the U.S. have said they will support inclusion if the yuan meets IMF criteria. It would be the first change in the SDR’s currency composition since 2001, when the euro replaced the German deutsche mark and French franc.

The Washington-based fund’s endorsement would mark a major milestone in a decades-long ascent toward international credibility for the yuan, which was created after World War II and for years could be used only domestically in the Communist-controlled nation. Approval probably will make more countries comfortable including the currency in their foreign-exchange holdings, while boosting President Xi Jinping’s drive to open up the world’s second-biggest economy.

 Inclusion would also be a bright spot for China in a tumultuous year for its economy, which has been buffeted by slowing growth, a tumbling stock market and a shift by authorities toward a more market-oriented exchange rate. Market turmoil worldwide followed a devaluation of the yuan in August and the government attempted to prop up equities, spurring investors to question the credibility of policy making.

IMF staff members determined that the yuan meets the requirement of being “freely usable,” Lagarde said in an e-mailed statement. The board had rejected including the yuan following the last review, in 2010, concluding the currency didn’t meet the test.

“The staff also finds that the Chinese authorities have addressed all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July,” Lagarde said, adding that she supports the findings.

The IMF said “freely usable” refers to a currency being widely used for international transactions and widely traded in foreign-exchange markets. The fund didn’t immediately provide a copy of the report to be presented to the board.

This “is a very clear and strong endorsement,” said Brendan Ahern, managing director of Krane Fund Advisors LLC in New York. “No hesitation, no ifs, no buts. Very strong recommendation from Christine Lagarde. It isn’t a vote but at the same time it is hard to find any reasons to disagree.”

Board Meeting

The report will inform the IMF executive board, which represents the fund’s 188 member nations, ahead of a meeting planned for Nov. 30 to consider the matter. The IMF is wrapping up its twice-a-decade review of the composition of the SDR basket.

“Essentially this is a done deal,” said David Loevinger, managing director of emerging-markets sovereign research at asset manager TCW Group Inc. in Los Angeles. “We could end up seeing more flexibility in the currency” once the yuan is added to the IMF basket, said Loevinger, a former China specialist at the U.S. Treasury Department.

http://www.bloomberg.com/news/articles/2015-11-13/imf-staff-recommend-yuan-be-included-in-reserve-currency-basket

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