19 October 2018
PBoC deputy governor Yi Gang has high hopes about boosting the renminbi's international stature in the near future. Photo: Bloomberg
PBoC deputy governor Yi Gang has high hopes about boosting the renminbi's international stature in the near future. Photo: Bloomberg

Renminbi could become a reserve currency this year

A wavy red line still appears today under the word “renminbi” when you type it in a Microsoft Word file, indicating you have made a spelling mistake.

Although the name of China’s currency has been widely used in the English-speaking world for years, Word’s spell-checker has yet to register “renminbi” as a real word.

Is it because the currency still hasn’t been globally accepted, or is it a case of Microsoft being behind the times?

Perhaps things will be different once the renminbi is recognized as one of the world’s reserve currencies.

Yi Gang, deputy governor of the People’s Bank of China (PBoC), has high hopes about boosting the currency’s international stature in the near future.

“Chances are high that the International Monetary Fund [IMF] will include the currency in its Special Drawing Rights [SDR] this year,” Yi said at a news conference in Beijing last week.

“We are evaluating this and are actively in talks with the fund.” 

Yi went on to say that the internationalization of the renminbi, also known as the yuan, has made big strides over the last five years.

“We hope the IMF will recognize the progress of yuan internationalization and allow the yuan to be part of the SDR basket in the foreseeable future,” he said.

As part of China’s efforts to further internationalize its currency, PBoC governor Zhou Xiaochuan recently said the ceiling on the interest rate paid on bank deposits may be lifted this year.

He also indicated that the long-awaited insurance plan to protect bank depositors will be launched within the next couple of months.

Should the renminbi be included in the SDR, it would immediately be given official recognition of its reserve currency status, boosting demand for the currency overnight.

It would also grant China a bigger say on economic and financial policies in the international arena.

There are two criteria for IMF to judge whether to add a currency to its SDR mechanism: first, the value of global trade denominated in that currency; and second, the ability to use it freely.

Last time the IMF reviewed the composition of the SDR in 2010, it concluded the renminbi did not meet the key criterion of being a freely usable currency.

But a lot has changed since then.

For example, the status of renminbi has been raised by the British government’s decision in September to issue renminbi-denominated bonds.

Chancellor of the Exchequer George Osborne said the proceeds would be kept as part of the country’s foreign currency reserves.

Moreover, there are reports the European Central Bank is considering adding the renminbi to its reserves, joining France and Switzerland, which have already decided to do so, and that’s not to mention the popularity of renminbi among Asian countries.

However, there is a snag: the renminbi still lacks formal convertibility for transactions that move capital into and out of China, which is a prerequisite of a reserve currency.

The IMF will hold discussions in May and make a decision in November on whether to add the renminbi to the four currencies (the US dollar, euro, Japanese yen and British pound) it uses to value its SDR.

It is widely believed that China may get what it wants from the IMF by promising it will open up its capital market in a gradual manner.

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EJ Insight writer

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