IMF targets formal review of Rmb by year-end

The institution said it would formally review the renminbi's bid to become one of the agency's reserve currencies.

The International Monetary Fund said it will formally review the renminbi's inclusion in its basket of reserve currencies late this year, while its staff proposed extending the current SDR basket to next year as significant preparatory work needs to be done ahead of the final decision.

“The executive board [of the IMF] will formally discuss the review towards the end of the year,” Siddharth Tiwari, director of the IMF’s strategy, policy and review department, said in a statement.

Such a review requires a significant amount of preparatory work before the IMF staff can make a formal recommendation of the Rmb to the agency's board, according to an IMF staff report issued on Tuesday. 

The proposed nine-month extension of the current special drawing rights (SDR) basket, which is due to expire at the end of the year, will be put before the board for approval later this month. 

"This [proposed extension] is in response to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year [when the trading is thin] and facilitating continued smooth functioning of SDR-related operations," said Tiwari. " [The extension] would also allow users to adjust to a potential changed basket composition should the executive board decide to include the Rmb." 

He added the proposed extension however would not "in any way prejudge the timing of conclusion or outcome of the review [on the Rmb’s inclusion].” 

The Chinese official Xinhua News Agency on Wednesday cited senior IMF officials as saying the formal review will proceed as scheduled towards the end of the year. The Xinhua report came after several Western media outlets reported the IMF may “delay the inclusion of the Rmb” to its SDR basket until September 2016.

Introduced in 1969, the SDR is used to supplement IMF member countries’ official reserves and is currently comprised of the dollar, euro, yen and pound. 

Rmb respect

In recent years, China has stepped up efforts to get the Chinese yuan admitted into the SDR club in what is widely viewed as an important step toward the internationalisation of the currency.

The world's second largest economy is eager to see the renminbi attain global status and reduce dependence on the dollar. With this goal in mind, Beijing has introduced several pilot programmes to liberalise the country’s capital markets.

In May, the IMF said for the first time that the Rmb was “no longer undervalued” - a sign that the institution was endorsing Beijing’s liberalisation efforts.

The inclusion of currencies into the SDR basket is based on two key criteria – the size of a country’s exports and whether its currency is “freely useable”.

In its last review in 2010, the IMF said China had already met the export criterion but the Rmb was not included because “it was not judged to be freely usable”.

Close, but no SDR

“Across a range of indicators, the Rmb is now exhibiting a significant degree of international use, especially in Asia and increasingly in Europe,” the IMF said in the Tuesday report. “At the same time, the four freely usable currencies generally rank ahead of the Rmb.”

Last year, the yuan ranked seventh among all payment currencies, according to the global transaction organization SWIFT.

The IMF report also called on China to grant foreign investors wider access to its onshore stock and bond markets.

“Restrictions on access to onshore markets pose difficulties in these areas [market-based exchange and interest rates, and hedge SDR-denominated positions],” the IMF said. “Although the Chinese authorities have begun to implement such measures.”

Beijing in recent weeks has reiterated its intention to reform the country’s financial markets in a steady, gradual manner.

Last month, the People’s Bank of China scrapped a pre-approval requirement for foreign institutional investors to tap the country’s $6 trillion interbank bond market

Analysts at CICC, a top Chinese investment bank, said the SDR bid will increase pressure on China to push forward market-oriented financial reforms.

"The push for financial reforms by the Rmb's SDR bid will have far-reaching implication for China's economy," they wrote in a note on Wednesday.

The IMF report made no mention of the Chinese government’s recent intervention in the country's volatile equity market. Beijing’s extraordinary “rescue measures” triggered criticism from foreign investors over the country’s unwillingness to subject itself to the rigours of market discipline.

Redback's backers

However, Christine Lagarde, the IMF's managing director, said last week that the intervention would not dent the yuan’s chance of gaining reserve status in the SDR formal review.

Several IMF member countries, such as France, Germany and the UK, have expressed support for the Rmb’s bid to be included this year.

The US, which has the biggest say in the IMF, doesn’t think the yuan is ready for SDR inclusion.

Jacob Lew, the American treasury secretary, urged China to loosen financial controls before winning the IMF's blessing on yuan inclusion after meeting with Chinese Premier Li Keqiang in Beijing in April.

Steve Wang, head of fixed-income research at Bank of China International and an expert on the renminbi, said the US "knows well" the Rmb should be included in the SDR basket in the near future given the significance of China’s economy and balance of trade.

He added the IMF’s staff report could however cast uncertainty on the redback’s chances as it would take time for IMF staff to fully assess the use of the currency internationally as well as China’s relevant policies.

“Two months ago, I would say 60% [pro SDR inclusion] versus 40% [anti SDR-inclusion],” Wang told FinanceAsia. “Now, I would probably say 50% pro versus 50% con.”

Wang Tao, chief China economist at UBS, added his voice to the pro-Rmb chorus when she said it is still “highly likely” that Rmb will be included in the IMF basket.

“In fact, the IMF article implies a large likelihood of the SDR inclusion, otherwise the technical preparation would not be necessary,” she wrote in a note on Wednesday.

Christine Lagarde said earlier this year that the Rmb’s inclusion is “a matter of when, not if”.

Wang from BOCI said he would like to see inclusion in the upcoming review.

“The inclusion will be a milestone for the Rmb’s internationalisation,” he said. “Of course, the sooner, the better [for China].”

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