China Retains Reserve-Currency Support After IMF Staff StudyMark Deen and Andrew Mayeda
China has retained the support of some major economies to win International Monetary Fund recognition of the yuan as a reserve currency, even as an IMF staff report assessed it hasn’t cracked the ranks of the most widely-used global counterparts.
Germany reiterated backing for the status “provided the necessary criteria are met,” while Brazil’s IMF representative said the yuan is moving toward qualifying and Russia said its view is based on China’s position. The comments followed a preliminary IMF staff report on Tuesday saying the yuan trailed other currencies in measures of global use and that “significant work” in analyzing data was needed.
The support from large economies will be key to IMF approval for adding the yuan, also known as the renminbi, to join the dollar, euro, yen and pound in the group that makes up the fund’s Special Drawing Rights basket of currencies. While the U.S. has urged China to make additional reforms to qualify, America won’t be able to veto a decision to add the yuan unless the criteria are fundamentally changed.
“In a photograph, the renminbi wouldn’t be there yet, but the film, the movement since 2010, in my view points in that direction,” Otaviano Canuto, executive director on the IMF board for Brazil and 10 other countries, told reporters late Thursday in Rio de Janeiro.
France expects that China’s accession to the group is inevitable in the long run, though the currency needs to be convertible, according to a Finance Ministry official. The U.K. Treasury said in an e-mail that the IMF’s review is the right process and shouldn’t be prejudged.
Germany, the largest economy in the 19-nation euro area, hasn’t changed its stance on the yuan’s inclusion in the SDR basket, the Finance Ministry said in an e-mail Thursday.
Russia is looking to China’s position on the timing of adding the yuan to the SDR group, Deputy Finance Minister Sergey Storchak said in an e-mailed response through the ministry’s press service.
The IMF report represents preliminary discussions, and it’s necessary to keep technical issues of adding currencies to the basket in mind, Storchak said.
Chinese officials including central bank Governor Zhou Xiaochuan have called on the IMF to add the yuan to its SDR basket.
The IMF staff report suggested that the decision will come down to more than just the staff’s view. “The ultimate assessment by the board will involve a significant element of judgment,” the report said. The staff study proposed delaying the yuan’s potential entry by nine months through September 2016 to make the transition smoother.
Operational issues include having a suitable exchange rate to help determine the daily value of the SDR and having an “appropriate interest-rate instrument” denominated in yuan, 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 board asked staffers for supplemental indicators to show the “flow” of yuan assets, such as the pace of debt issuance, as opposed to “stock” indicators including levels of reserves, Canuto, the Brazil director, said in a separate interview Friday.
Such “flow” measures are “most important in terms of representativeness of a currency as a reference for the SDR,” Canuto said.
Those measures could give a sunnier picture for the yuan: For example, official foreign-currency assets in yuan rose by about $31 billion in 2014, compared with smaller gains for pound- and yen-denominated assets, and a drop in euro assets, figures in the IMF report show.
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