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The International Monetary Fund’s staff has recommended that China’s renminbi should join the elite basket of currencies used to value its own de facto currency.
The move is a vote of confidence in China’s economic reforms and its efforts to establish the nation’s currency as an international reserve asset.
If approved, as expected, at a November 30 board meeting, it would mark the first significant change to the IMF’s “Special Drawing Rights” (SDR) basket since the inclusion of the euro at its creation in 1999.
It would also be a victory for China, which has been eager to see the renminbi join the dollar, euro, yen and pound in the basket, and gain the stature of a reserve currency that comes with it.
The inclusion of the renminbi as the fifth currency in that basket would be a “momentous event in the annals of international finance”, said Eswar Prasad, a former IMF economist and China mission head.
“It represents an important step in the renminbi’s ascendancies to the status of a global reserve currency, and will have gradual but significant repercussions in global currency markets and on international capital flows,” he said.
Christine Lagarde, the IMF’s managing director, said a lengthy staff review had determined that the renminbi met the fund’s two main criteria for inclusion — that it was “widely used” and that it was “freely usable”.
Because of China’s status as the world’s largest trading nation, the renminbi met the “widely used” criteria some time ago, and the IMF’s review has focused on whether it is freely usable.
That assessment has been focused mostly on whether the renminbi could be used as needed by the IMF’s 188 member countries if they were given loans denominated in the currency. For China, satisfying that criteria has meant opening up its bond market for use by other countries’ central banks and other measures.
The IMF staff on Friday sent a paper detailing its findings to the IMF board, which is now expected to approve that recommendation on November 30.
It represents an important step in the renminbi’s ascendancies to the status of a global reserve currency
- Eswar Prasad, former IMF economist and China mission head
“I support the staff’s findings,” said Ms Lagarde.
In a statement, the People’s Bank of China thanked the IMF for the recommendation and said it was “an acknowledgment of the progress in China’s recent economic development, reform and opening up”.
“Going forward, China will continue to deepen economic reforms and promote financial opening up,” the PBOC said.
Including the Chinese currency in the SDR basket would “help improve the current international monetary system, which would benefit both China and the rest of the world,” the PBOC said. “We hope the RMB’s inclusion in the SDR basket will be supported by the international community.”
The US and leading European shareholders have said in the past that they would support the renminbi’s inclusion in the SDR basket should the staff determine that it had cleared the necessary hurdles.
“As we have previously stated, we intend to support the renminbi’s inclusion in the Special Drawing Rights basket provided the currency meets the International Monetary Fund’s existing criteria,” a US Treasury spokesman said after Friday’s announcement. “We will review the IMF’s paper in that light.”
Douglas Rediker, a former US representative at the IMF, said the fact that the US was supportive, that major European shareholders and that Ms Lagarde had come out so strongly for the recommendation “means that the outcome is effectively pre-ordained”.
But it was also overdue, he said.
The staff recommendation was “a recognition of the increasing role that China and its currency plays in the global financial and trading system,” Mr Rediker said. “Failure to include the RMB . . . would be a failure to move to a global recognition of reality.”
The move is a vote of confidence in China’s economic reforms and its efforts to establish the nation’s currency as an international reserve asset.
If approved, as expected, at a November 30 board meeting, it would mark the first significant change to the IMF’s “Special Drawing Rights” (SDR) basket since the inclusion of the euro at its creation in 1999.
It would also be a victory for China, which has been eager to see the renminbi join the dollar, euro, yen and pound in the basket, and gain the stature of a reserve currency that comes with it.
The inclusion of the renminbi as the fifth currency in that basket would be a “momentous event in the annals of international finance”, said Eswar Prasad, a former IMF economist and China mission head.
“It represents an important step in the renminbi’s ascendancies to the status of a global reserve currency, and will have gradual but significant repercussions in global currency markets and on international capital flows,” he said.
Christine Lagarde, the IMF’s managing director, said a lengthy staff review had determined that the renminbi met the fund’s two main criteria for inclusion — that it was “widely used” and that it was “freely usable”.
Because of China’s status as the world’s largest trading nation, the renminbi met the “widely used” criteria some time ago, and the IMF’s review has focused on whether it is freely usable.
That assessment has been focused mostly on whether the renminbi could be used as needed by the IMF’s 188 member countries if they were given loans denominated in the currency. For China, satisfying that criteria has meant opening up its bond market for use by other countries’ central banks and other measures.
The IMF staff on Friday sent a paper detailing its findings to the IMF board, which is now expected to approve that recommendation on November 30.
It represents an important step in the renminbi’s ascendancies to the status of a global reserve currency
- Eswar Prasad, former IMF economist and China mission head
“I support the staff’s findings,” said Ms Lagarde.
In a statement, the People’s Bank of China thanked the IMF for the recommendation and said it was “an acknowledgment of the progress in China’s recent economic development, reform and opening up”.
“Going forward, China will continue to deepen economic reforms and promote financial opening up,” the PBOC said.
Including the Chinese currency in the SDR basket would “help improve the current international monetary system, which would benefit both China and the rest of the world,” the PBOC said. “We hope the RMB’s inclusion in the SDR basket will be supported by the international community.”
The US and leading European shareholders have said in the past that they would support the renminbi’s inclusion in the SDR basket should the staff determine that it had cleared the necessary hurdles.
“As we have previously stated, we intend to support the renminbi’s inclusion in the Special Drawing Rights basket provided the currency meets the International Monetary Fund’s existing criteria,” a US Treasury spokesman said after Friday’s announcement. “We will review the IMF’s paper in that light.”
Douglas Rediker, a former US representative at the IMF, said the fact that the US was supportive, that major European shareholders and that Ms Lagarde had come out so strongly for the recommendation “means that the outcome is effectively pre-ordained”.
But it was also overdue, he said.
The staff recommendation was “a recognition of the increasing role that China and its currency plays in the global financial and trading system,” Mr Rediker said. “Failure to include the RMB . . . would be a failure to move to a global recognition of reality.”
