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IMF expects to uphold inclusion of yuan into SDR basket today
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THE International Monetary Fund is expected to approve inclusion of the yuan in its Special Drawing Right basket of elite currencies today.
The IMF executive board is scheduled to meet today to decide on the recommendation by staff experts earlier this month to include the yuan alongside the US dollar, euro, yen and pound in the basket.
While not a freely traded currency, the SDR is important as an international reserve asset, and because the IMF issues its crisis loans — crucial to struggling economies like Greece — valued in SDRs.
China, now the world’s second-largest economy, asked last year for the yuan to be added to the grouping of world reserve currencies, but until recently it was considered too tightly controlled to qualify.
It is extremely rare that the executive board, which represents the IMF’s 188 member nations, opposes the recommendation of its own experts.
IMF Managing Director Christine Lagarde said in mid-November that she supported the experts’ finding that the yuan had met the requirements to be a ‘freely usable’ currency” — a key hurdle for SDR status.
If accepted, the decision would not take effect before September 30, 2016, to allow users more time to prepare. The last time the SDR basket was modified was in 2000, when the euro replaced the German deutschemark and the French franc.
The remaining question is the yuan’s weight in the basket. It could be 10 percent to 16 percent, but the lower estimate is more likely due to the Chinese currency’s limited convertibility.
The basket composition is reviewed every five years. At the last rebalancing in 2010, the dollar accounted for 41.9 percent, the euro 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.
That weighting revision was based on the value of the exports of goods and services by country or currency zone, and the amount of reserves denominated in the respective currencies held by other IMF members.
The entry of the yuan will see the Chinese curreny graduate to the inner circle of the world’s most important currencies.
The vote of the United States, the largest IMF stakeholder, will be closely watched, as will US political reactions. US officials have long accused China of keeping the yuan artificially low to gain a trade advantage, making its exports relatively cheaper.
The US Treasury Department, in an October 19 report, said that the yuan “remains below its appropriate medium-term valuation.”
Paradoxically, China’s unexpected devaluation of the yuan last August received good marks from the IMF because it reinforced the currency’s movements with market forces and opened the door to future revaluation.
China on Wednesday announced an initial group of foreign central banks has been allowed to enter the Chinese currency market, which likely will promote further internationalization of the yuan in global trading.
Credit rating firm Fitch says it does not expect the yuan’s inclusion in the IMF basket “to lead to a material shift in demand for renminbi assets globally in the short term.” But it said over time the yuan’s emergence as a global reserve currency could support China’s credit rating.
An IMF decision to include the yuan among its elite currencies risks angering some US lawmakers amid fierce maneuvering for the 2016 presidential election.
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