China’s calculated diplomatic push to globalise the use of yuan has hit a roadblock. The International Monetary Fund should put off any move to add the currency to its benchmark Special Drawing Rights (SDR) basket until after September 2016, IMF staff said in a report last week.
Created in 1969, the SDR refer to supplementary forex reserve assets maintained by the IMF and reviewed every five years. The basket consists of the dollar (41.9%) the euro (37.4%) the pound sterling (11.3%) and the Japanese yen (9.4%), according to the 2010 review. But rarely in their 46-year history have SDR commanded such rapt attention than now in the wake of China’s efforts to make the yuan (officially called renminbi) a global currency.
The stakes are high for China.
A decision by the IMF to welcome the yuan would mean the Fund has endorsed it as a reserve currency, despite China’s extensive capital controls. It would, of course, not fortify the yuan overnight to challenge the dollar, but the nod would be a symbolic boost to the currency’s international standing, giving countries more confidence to add the yuan to their reserves.
The yuan’s international use has grown rapidly in recent years, albeit from a low base. In 2014 the currency accounted for 1.1% of countries’ official reserve assets, up from 0.7% in 2013. Some 0.6% of international debt securities are now denominated in yuan, up from just 0.1% in 2010. For cross-border payments, 1% are conducted in yuan, up from 0.2% in 2012.
As for the Gulf countries, yuan going global has significant implications. The GCC nations are set to witness an increasing level of yuan deals to support the growing cross-border trade and investment flows between China, the Gulf and the wider Middle East, according to a Credit Agricole report in May. “As the GCC’s (Gulf Co-operation Council) largest trading partner, China is set to play an important role in the region’s businesses and particularly in regards to commodity related activities and joint infrastructure investment projects,” the report said.
Qatar has set up the region’s first offshore renminbi clearing centre to facilitate greater trade and economic links between China and the GCC region.
China has retained the support of some major economies to win the IMF recognition despite the staff report setback. Germany has reiterated the backing for the status “provided the necessary criteria are met,” while Brazil’s IMF representative said the yuan is moving toward qualifying and Russia said its view is based on China’s position.
The IMF staff paper shows the SDR basket is drawing closer for the yuan, but may need a final, little goodwill from the directors deciding on it.
There are, for sure, doubts about China’s commitment to market reforms, especially after its heavy-handed intervention to stem the stock market rout. But for the SDR basket, the yuan is on road to make the cut. The only question is: When?