Get ready for yuan in IMF basket

The SDR, created by the IMF as long ago as 1969 in order to supplement member countries' official currency reserves, is widely recognized as a major global reserve asset. As a result, it is only the most prominent and stable, global currencies that are included in the SDR currency basket: the US dollar, the euro, the British pound and the Japanese yen.

Clearly, inclusion in the IMF's SDR currency basket provides a tangible badge of recognition.

So, while the overall likelihood of yuan inclusion in the IMF's SDR by the end of this year is high, are there any signs or even hints that this may actually take place?

Yes, plenty.

Most notably, it is recent economic reform plans put forward by China's central government that, in effect, have paved the way for SDR inclusion. Specifically, the opening-up of China's capital account and the deepening of its financial markets will certainly have been met with firm approval by the IMF as it mulls over yuan inclusion. Furthermore, earlier this year, IMF head Christine Lagarde stated publicly that it was a question of "when" and not "if" the yuan will be included in the SDR currency basket.

The IMF's formal five-year SDR review period ends in the autumn this year and at this time a simple majority vote would be sufficient to bring into effect any change in the current SDR currency basket.

Perhaps the only potential obstacle at this present time is the IMF's "freely usable" criterion, which is usually interpreted as full currency convertibility.

But even the IMF appears to be appreciative of China's efforts to allow for and encourage greater use of its currency worldwide, both for trade and investment. The full convertibility interpretation, therefore, may well be diluted to accommodate the yuan.

The IMF should also understand that any rush to full convertibility of the yuan could undermine the carefully managed transitionary state of the Chinese economy. Moving from an economy based on low-cost production to one driven by investment in high technology, high quality and premium brand building does not happen overnight. During this transition it would be dangerous in the extreme to expose the Chinese currency totally to market forces.

However, in order to expedite this transition and fuel further the internationalization of the Chinese economy, the IMF is also well aware of the boost that SDR inclusion would undoubtedly bring.

It is, therefore, quite possible that the IMF might tinker with its rules for SDR inclusion, with the yuan in mind. But any rule change would then require a 70 to 85 percent majority on the 24-member IMF executive board.

Despite positive signs and public statements, it may actually be the dire state of the global economy and the euro zone, in particular, that determines IMF decisionmaking on the SDR currency basket.

The IMF is all too aware of the crucial supporting role Chinese investment has played across Europe and beyond over recent years and the growth potential. Promoting the yuan to its SDR currency basket will only add fuel to this investment drive and provide further support to the still beleaguered European economy and, at best, a sluggish US economy.

European businesses should, therefore, be following developments and any public rhetoric on this issue extremely closely and should be preparing for a "yes" to yuan's inclusion in the IMF's SDR currency basket, effective from January 2016.

The author is a visiting professor at the University of International Business and Economics in Beijing and a senior lecturer on marketing at Southampton Solent University's School of Business. The views do not necessarily reflect those of China Daily.

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