China Seen Winning IMF Reserve-Currency Endorsement in 2015

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China’s goal to attain endorsement of the yuan as a reserve currency will be achieved this year, according to most economists surveyed by Bloomberg.

Eleven out of 16 polled by Bloomberg in the June 18-24 period predict the International Monetary Fund will add the Chinese currency to its Special Drawing Rights basket at a review in 2015. The Washington-based institution rejected the yuan in 2010 on the grounds it was not “freely usable.”

Global yuan adoption is on the rise as China gradually opens up its domestic capital market to foreign investors and expands a network of lenders that clears trades in the unit. The yuan, officially called renminbi, overtook the euro in 2013 as the world’s second-most used in trade finance and was the fifth most-popular for global payments in May, according to the Society for Worldwide Interbank Financial Telecommunications.

“We expect that the IMF will finally accept renminbi as the renminbi has been widely used as a settlement currency for both trade and foreign direct investment,” said Le Xia, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA.

Joining the ranks of the dollar, euro, pound and yen in the IMF’s reserve-currency basket could lead to $1 trillion of inflows into yuan assets, BlackRock Inc. estimated this week. Inclusion would also allow China to challenge the greenback’s dominance in global trade and finance.

Political Decision

Chinese Vice Premier Wang Yang said Wednesday the U.S. pledged to respect IMF procedures on China’s efforts to win reserve-currency status for the yuan, commenting at the end of an annual summit between the two nations. The U.S. has 17 percent of votes in the IMF’s executive board and Treasury Secretary Jacob J. Lew said the real test will be what China does when there’s pressure on its currency to strengthen.

China is committed to increasing exchange-rate flexibility and moving more rapidly toward a market-oriented system, the U.S. Treasury Department said in a statement on Thursday. “China pledged for the first time to intervene in foreign-exchange markets only when necessitated by disorderly market conditions,” it said.

The SDR review will be conducted in November instead of October and 70 percent of votes are likely required to approve the yuan’s inclusion, an IMF official said Thursday in Washington.

Yuan Rebound

The yuan fell as much as 1.1 percent earlier this year as an economic slowdown spurred capital outflows. The currency has almost recovered the loss after Chinese officials since March called for the IMF to add the yuan to the SDR basket and pledged to bolster the currency’s usage.

The State Council this week proposed to remove a two-decade-old limit on bank lending. Last month, the country opened a market for short-term loans to foreign banks. The decision on whether to include the yuan in the SDR basket could be a political one, according to ING Groep NV and Bank of Communications Co.

“The renminbi has the basic qualification to be a freely used currency,” said Liu Li-gang, Australia & New Zealand Banking Group Ltd. chief China economist in Hong Kong. “The West could gain more from the renminbi’s inclusion into the SDR as this policy action will help accelerate China’s capital-account liberalization and domestic financial reform.”

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