IMF to review case for inclusion of RMB in global currency basket

SINGAPORE - The International IMF will this minth review whether to include China’s RMB in the currency basket of Special Drawing Rights (SDR), and will make a final decision by year-end.

ANZ bank says the bone of contention in this year’s review is to determine whether the RMB is a ‘freely usable currency’ in trade and financial transactions.

Since the last review in 2010, the IMF has been contemplating an explicit criterion-based approach in determining a currency’s eligibility to the SDR basket. In particular, the focus seems to have shifted to whether a currency can perform as a reserve asset.

Indicators such as the size of FX market turnover, availability of interest rate instruments, and derivative products for hedging central bank reserves have become important variables in the assessment.

“Based on these criteria but with modest modification, we find the RMB has already received a higher score than the JPY even though much of the available data is dated,” ANZ says. “Therefore, the RMB should qualify for inclusion in the SDR basket.”

ANZ adds:  “While it appears to be a contentious issue, the RMB’s inclusion into the SDR has little tangible and immediate economic benefit for China. The SDR is rarely used by the global financial markets, and no country would manage foreign exchange reserves modelled by the SDR.

“However, RMB’s inclusion into the SDR will have a lock-in effect on China’s capital account liberalisation and domestic financial reform. Integrating China’s financial system into the global one will fundamentally address the economic imbalances that have troubled the global economy since China’s accessionto the WTO.

“This suggests that the Western world led by the US should welcome the RMB’s inclusion into the SDR. Indeed, the rest of the world would have a much bigger gain than China.” www.live.anz.com (ATI).