24 August 2019
IMF managing director Christine Lagarde (left) and China's central bank governor Zhou Xiaochuan are shown at an event in the US last year. Photo: Xinhua
IMF managing director Christine Lagarde (left) and China's central bank governor Zhou Xiaochuan are shown at an event in the US last year. Photo: Xinhua

What the world can gain from having yuan in SDR basket

The International Monetary Fund (IMF) will hold its next twice-a-decade review during which it will consider whether to include the yuan in the special drawing rights (SDR) system.

China is pushing the internationalization of its currency on the back of the emerging Asian Infrastructure Investment Bank (AIIB) which is pitting the country against the United States.

SDR was created by the IMF in 1969 to supplement the foreign exchange reserves of its members.

It is not a currency but a potential claim on the freely usable currencies of IMF members.

At present, SDR consists of the US dollar, euro, Japanese yen and pound sterling, comprising 41.9 percent, 37.4 percent 9.4 percent and 11.3 percent, respectively, of the currency basket.

European nations and the US are split over the inclusion of the yuan in the SDR basket.

Major European countries such as Britain and Germany are openly voicing support for the move. Both are trying to cement their status as major offshore centers for the yuan.

Britain favors the eventual inclusion of the yuan in the SDR basket, according to Finance Minister George Osborne, adding it is important to include emerging powers in the world system.

By contrast, US Treasury Secretary Jack Lew said the Chinese currency is not ready to join SDR.

“While further liberalization and reform are needed for the [yuan] to meet this standard, we encourage the process of completing these necessary reforms,” Lew said.

To qualify for inclusion, the renminbi must meet two criteria — size of the country’s exports and whether the currency is freely usable.

The redback fully satisfies the first condition.

As the world’s second largest economy, China is the world’s largest exporter and the renminbi has been increasingly used worldwide.

State news agency Xinhua reported that the Chinese currency has become the world’s second most popular currency for trade finance and one of the most widely used.

More than 60 countries and regions have adopted the renminbi as a reserve currency.

Offshore yuan trading completed through the Thomson Reuters platform surged 350 percent last year.

Also, the Chinese central bank has signed currency swap deals with 31 countries and regions since 2008, in all worth 2.9 trillion yuan (US$466 billion).

However, there are different views on the second condition.

In a 2011 review, the IMF said a freely usable currency means the currency is widely used and also widely traded.

The renminbi has basically met this criteria. However, the US insists the requirement refers to convertibility.

Then there is the matter of balance of payments which include current account and capital account.

The Chinese currency fulfilled the convertibility requirement in its in current account in 1996.

Beijing is pushing reform to gradually liberalize its capital account. The move has been welcomed by IMF managing director Christine Lagarde.

Even with European backing, China still has to pass the IMF review and needs the support of 70 to 85 percent of the IMF council.

The outcome largely hinges on two things.

The US has a 16.75 percent voting right in IMF and could hold sway in the voting. It would not want to let China win more influence in global finance as we’ve seen from its opposition to AIIB.

Also, the yuan’s inclusion in the SDR basket might threaten the status of the US dollar, so the US is very likely to reject it.

The political standoff between Democrats and Republicans would make the issue more complex.

It remains unclear whether the yuan will make it to the SDR system this year. If not, that could be only a matter of time.

Having the yuan in the SDR basket would help establish a stable global financial system, according to Nobel Prize winning economist Robert Mundell.

It will also accelerate the process of liberalizing interest rates and the capital account. The US government and US politicians should take these into account.

As for Beijing, it is determined to do it. 

Lo Mei-hwa co-wrote this article which appeared in the Hong Kong Economic Journal on April 27. She holds a master’s degree from the Chinese University of Hong Kong Department of Global Political Economy.  

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]


Executive Director, Institute of Global Economics and Finance; Associate Professor, Department of Economics at the Chinese University of Hong Kong

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