China’s Zhou Switches Topics on Lagarde to Put His Case for Yuan

Chinese central bank governor Zhou Xiaochuan joined International Monetary Fund Managing Director Christine Lagarde on a panel Sunday about monetary policy and instead discussed the merits of the yuan as a reserve currency.

Zhou and Lagarde were on stage at the China Development Forum in Beijing for a session titled “Sound Monetary Policy in the ‘New Normal’.” The central banker made it clear he had other plans.

“I think I have to research and consider this topic more to give a better talk,” the 67-year-old Zhou said. Instead, since Lagarde was present and the IMF will consider adding the yuan to its Special Drawing Rights system, “I’ll take the chance to talk about this,” he said.

For more than five years, Zhou has pushed for the yuan to be added to the SDR basket, a move that would pave the way for it to become a reserve currency, aiding China’s attempts to diminish the dollar’s dominance in global trade and finance. The nation’s ascent to become the world’s second-largest economy has bolstered his case.

The IMF created the SDR in 1969 to support the Bretton Woods system of fixed exchange rates after supplies of gold and dollars proved inadequate. Owning SDRs gives countries a claim to the four currencies in the basket: the dollar, euro, yen and U.K. pound.

The composition of the SDR basket is reviewed every five years. In 2010, the IMF decided that the yuan couldn’t be added because it wasn’t “freely usable.” Zhou used the panel Sunday to tell Lagarde how the currency is getting freer.

Overseas Investors

Allowing foreign investors to trade Shanghai-listed stocks through a link with Hong Kong’s exchange and giving overseas funds greater access to Chinese stocks and bonds were among examples he cited. Rules on Chinese citizens investing as individuals overseas will be relaxed, and other measures -- Zhou wasn’t specific -- will be taken this year to increase the yuan’s convertibility under the capital account, he said.

The IMF said in December that it would conduct the review of the SDR basket in October after staring with an informal briefing in May.

In response to Zhou’s briefing, Lagarde, 59, said the yuan “clearly belongs” in the SDR basket and that the IMF would work with China to that end. “Timing is something that we will be discussing amongst ourselves but I think we welcome this introduction and comments that you made,” she said.