China’s currency, the yuan, took another step forward towards joining the elite group of global reserve currencies on Saturday when the International Monetary Fund’s (IMF) staff on Saturday recommended that the Chinese currency be included in the IMF’s benchmark foreign exchange basket, a move that will indirectly benefit India as well.
Managing Director of the IMF Christine Lagarde also endorsed the yuan’s inclusion in the IMF’s Special Drawing Rights basket.
“The staff of the IMF has today issued a paper to the Executive Board on the quinquennial review of the SDR (Special Drawing Rights). A key focus of the Board review is whether the Chinese renminbi (RMB)… also meets the other existing criterion, that the currency be ‘freely usable’, which is defined as being ‘widely used’ for international transactions and ‘widely traded’ in the principal foreign exchange markets,” Ms. Lagarde said in a statement.
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Ms. Lagarde also added that she supported the staff’s findings that the Chinese currency meets these criteria and should be included in the SDR basket. However, she admitted that the final decision rests with the IMF’s Executive Board. “I will chair a meeting of the Board to consider the issue on November 30,” she said. The yuan had failed to meet the ‘freely usable’ criterion the last time it was assessed, in 2010.
SDR are not a currency themselves, but are a certain number of rights given by the IMF to countries who, in a crisis, can draw upon any of the reserve currencies in the basket — currently the dollar, euro, yen and pound.
The inclusion of the yuan in this basket has been endorsed by almost all of the major economies of the world, including Germany, Britain, France and Italy. The U.S. was historically cautious about this, but recently softened its stance in September when President Obama said the U.S. would support China’s bid for inclusion in the SDR basket as long as it met the IMF’s technical specifications, which it now has.
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While the IMF’s Executive Board has the final say in deciding whether the yuan joins the basket of reserve currencies, the matter is not yet certain. Complicating the issue is the fact that the U.S. Congress has been stymieing reforms that would increase China’s voting powers at the IMF.
At the moment, China has less than 4 per cent of the voting power in the IMF, just a little more than Italy, which has an economy around one-fifth the size of China’s. Whether this lower voting power affects the decision on November 30 is yet to be seen.
Adding the yuan to the SDR basket will be a significant victory for China, Chief Economic Advisor Arvind Subramanian told The Hindu , adding that India will indirectly benefit from this.
“The yuan’s inclusion in the SDR basket, when it happens, will be a great victory for China. It will mean a global economic coming of age for them, and will mean that the yuan is now a reserve currency for the world and all that entails,” Mr. Subramanian said.
However, to meet the various requirements to achieve this, China has had to open up its closed capital account, he added, saying that this is ‘unambiguously a good thing’ for India.
“The ability of China to manipulate its exchange rate has become more restricted. Not only did India have to deal with China’s over-capacity, but also its devalued currency,” he said, adding that the latter will be less of a problem once the yuan enters the SDR basket.