The International Monetary Fund said the yuan trails its global counterparts in major benchmarks and that “significant work” in analyzing data is needed before deciding whether to grant the Chinese currency reserve status.
IMF staff members also opened the door to a possible delay in any approval with a proposal to postpone by nine months, until September 2016, the implementation of a change in the basket of currencies that make up the lender’s Special Drawing Rights, according to an update on the five-yearly review released Tuesday in Washington. The IMF said postponing the change would make the transition to a new basket smoother.
The report suggests that while approval by the IMF board isn’t yet assured, it’s within reach, and the decision will come down to more than just the staff’s assessment. China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while France has called for including the yuan, the U.S. has urged China to keep moving toward a flexible exchange rate and making financial reforms to qualify.
“The ultimate assessment by the board will involve a significant element of judgment,” the IMF report said.
The postponement sets the stage for the IMF to add the yuan to the SDR just before Chinese President Xi Jinping hosts a meeting of Group of 20 leaders next year, said David Loevinger, managing director of emerging-markets sovereign research at asset manager TCW Group Inc. in Los Angeles.
“The end game is obvious,” said Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department. “If the Chinese make this a priority, it’s pretty certain President Xi will have his deliverable at the G-20.”
The delay may buy China some time to implement reforms including opening up the capital market, which have been complicated by the government’s efforts to stem a near-$4 trillion stock rout. The barrage of measures include cutting interest rates to a record low and banning shares sales by major investors.
“Lots of preparation needs to be done, especially in the front of managing risks,” Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “If it’s not ready to open the capital account, it’d be better not to force it. Capital controls saved China in 1997, in 2008 and now.”
The report doesn’t refer to the recent interventions to stem the equities slump. IMF Managing Director Christine Lagarde said last week the interventions shouldn’t derail the SDR review.
The IMF’s executive board, which represents the fund’s 188 member nations, still plans to formally discuss the review toward the end of the year, Siddharth Tiwari, head of the IMF’s Strategy, Policy and Review Department, said in a statement. The proposed extension in implementation will be decided later this month and won’t “in any way prejudge the timing of conclusion or outcome of the review,” he said.
It’s highly likely the yuan will be included in the SDR basket, Wang Tao, chief China economist at UBS Group AG in Hong Kong, wrote in a note after the IMF report was released. She pointed to the amount of technical preparation being done as a sign the Chinese are likely to succeed in their bid.
The fund said international use of the yuan, officially called the renminbi and abbreviated RMB, has increased over the last five years, albeit from a low base. “Across a range of indicators, the RMB is now exhibiting a significant degree of international use, especially in Asia and increasingly in Europe,” the report said.
At the same time, the yuan trails other currencies in metrics the fund tracks in determining the SDR basket, according to the report.
To qualify for the basket, currencies must be “widely used” to make payments in global transactions, and “widely traded” in major exchange markets. Key indicators include the share a currency makes up of official reserves, international banking liabilities and global debt securities, as well as the volume of use in foreign-exchange markets.
Last year, the yuan ranked seventh among currencies as a share of official reserves, behind the four SDR members as well as the Australian and Canadian dollars, according to the IMF. The yuan constituted 1.1 percent of official reserves, compared with 63.7 percent for the U.S. dollar.
The yuan also ranks outside the top five in terms of debt securities and currency trading, according to the report.
Winning the IMF’s blessing, following a rejection in the last review in 2010, would give the yuan prestige as a reserve currency that makes it more attractive for central banks to hold and potentially reduces the dollar’s dominance worldwide. From a technical standpoint, owning SDRs counts toward a country’s official reserves; the U.S. holds $50 billion worth, out of about $280 billion allocated to IMF members worldwide.
The report said IMF staffers could include additional indicators to evaluate the yuan, such as cross-border payments and letters of credit of trade finance. The yuan ranks third behind the dollar and euro in terms of trade finance, according to the report.
Another wrinkle is that the IMF will assess whether yuan payments between the Chinese mainland and Hong Kong, Macau and Taiwan should be treated as international transactions, according to the report.
Taiwan, which China regards as a renegade province, has its own currency and central bank and has been ruled separately since a civil war that ended more than six decades ago. The IMF refers to the island as “Taiwan Province of China.”