IMF: RMB Not Yet Ready as SDR Currency

IMF says...wait a while longer for RMB SDR inclusion.

The PRC has been strongly pushing for the inclusion of the Chinese yuan in the basket of currencies which constitutes the IMF's Special Drawing Rights (SDRs). After all, shouldn't the currency of the world's second-largest economy be included in such as a basket? Unfortunately, just as with Chinese stocks not being included in the MSCI index of emerging market equities, the IMF has deemed China and its currency not quite ready for the primetime. Ho-hum, we've seen this movie before:

The International Monetary Fund should put off any move to add the yuan to its benchmark currency basket until after September 2016, IMF staff said in a report which showed a mixed performance of the renminbi on meeting key financial norms.
The report, published on Tuesday, comes after Beijing launched a major diplomatic push for the yuan to be added to the IMF's Special Drawing Rights basket as part of its long-term strategic goal of reducing dependence on the dollar. 

The pushback against yuan inclusion mainly concerns the lack of yuan use outside of Asia. Aside from the widespread use of RMB as a store of value, medium of exchange, and a unit of account, another concern is that IMF members may not have enough time to adjust to its inclusion in the SDR if accomplished this November. The latter is a technical concern over timing and the mechanics of SDR allotment, whereas the former is a fundamental one as to whether the yuan deserves inclusion:

The IMF board is scheduled to make a decision in November on whether to include the yuan in a basket of currencies comprising dollars, euros, pounds and yen, although the decision could be pushed back if policymakers decide they need more information.

Delaying any change in the basket for nine months through September 2016 would avoid disrupting financial market trading on the first day of the new year, the staff report said. A senior IMF official said reserve asset managers would need about six months notice to adjust to a change.

The yuan, also known as the renminbi, meets the requirements as a significant currency in terms of international trade, but also has to be judged to be "freely usable", or widely used to make international payments and readily traded on foreign exchange markets.

The report shows a mixed performance on financial criteria. Although the currency is increasingly used in cross-border transactions and heavily traded in Asia, it is only thinly traded in North America and is not commonly used in international debt securities. Data was missing for some variables, the report said.

Since this is the IPE Zone, we should also take note of the geopolitics behind yuan inclusion in the SDR. To no one's surprise, the United States and its regional ally, Japan, are discouraging such inclusion at the earliest opportunity (November this year). Meanwhile, Western European countries wishing to cotton up to the rising power indicate they are ready to get the RMB on board the SDR ASAP:

European members of the Group of Seven major industrialized economies - Germany, Britain, France and Italy - favor adding the yuan to the basket quickly. Japan, like the United States, is more cautious, officials have said...

Chinese Premier Li Keqiang in March asked Lagarde to push for inclusion, saying Beijing would speed up the convertibility of the yuan on the capital account and open domestic individual cross-border investment and foreign institutional investment in China's capital market.

Still, as IMF Managing Director Christine Lagarde has noted, it's only a matter of time until the yuan is included in the basket--just as its stocks will be in the MSCI emerging markets index.  Just not now.

The quoted report is downloadable from the IMF site.