Yuan banknotes are placed on a staff’s table in a bank in Lianyungang, China. China has ticked most of the boxes set by the International Monetary Fund  to grant the yuan reserve currency status, prompting many banks to predict approval this month.

Bloomberg
Beijing

China has ticked most of the boxes set by the International Monetary Fund (IMF) to grant the yuan reserve currency status, prompting many banks to predict approval this month.
An outright “yes” is the most probable outcome, Goldman Sachs Group wrote in an October 29 note. JPMorgan Chase & Co Chief China economist Zhu Haibin said any terms attached may be technical issues. Jukka Pihlman, head of central banks and sovereign wealth funds at Standard Chartered in Singapore and a former adviser to the IMF, said the agency would seek to avoid the uncertainty of conditional approval.
“It’s basically a done deal, unless something really surprising and unexpected happens,” said Pihlman.
China has been seeking to join the Special Drawing Rights basket as part of a campaign to play a larger role in the postwar global economic order dominated by the US and Europe. Membership of the IMF club would be a crowning achievement after three decades of breakneck growth that saw the Chinese economy take its place as the world’s second-largest after the US
Here’s a look at what the IMF, in an August 3 staff report, asked China to do, and how the nation has fared so far.
The People’s Bank of China’s daily yuan fixing isn’t based on market moves, and the gap between the currency’s price at home and abroad means the offshore rate can’t be used as a perfect hedge for onshore exposure.
The PBoC overhauled its reference rate mechanism on August 11, ordering market makers who submit contributing prices to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates. The central bank also took the previously rare step of intervening in the offshore yuan market, narrowing the gap with the onshore rate to about 0.4% from as much as 2% on August 12.
“China would like to see the fixing, the onshore yuan and the offshore currency trade close together for SDR inclusion,” said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd in Singapore. “If the rates are significantly different, it may cause confusion and complicate the computation of the SDR rate.”
There should be hedging tools - such as cross- currency swaps with long durations, or enough shorter hedges that can be rolled over at reasonable cost - for central banks to reduce exchange- and interest-rate risks.
The PBoC said in July that foreign central banks, sovereign wealth funds and global financial organisations will no longer need pre-approval to trade bonds, interest-rate swaps or conduct repurchase agreements in the onshore market. China will allow foreign central banks to trade all onshore currency products, including spots, forwards, swaps and options, the PBoC said in a statement on November 6.
China needs a yuan-based instrument for the SDR interest-rate basket. Such tools provide the basis for calculating the interest charged to members on loans from the IMF’s general resources and that paid on SDR holdings.The Ministry of Finance said it will start issuing three-month debt every week from the fourth quarter, which will help improve the short-term yield curve and promote the yuan’s internationalisation. The central bank scrapped a deposit-rate ceiling on October 24, pushing ahead with moves to free up the interest-rate system.
There should be a suitable exchange rate during London trading hours to determine the SDR’s daily value in terms of the dollar.
China plans to extend the currency’s trading hours to 11:30 p.m. in Shanghai from the current 4:30pm, according to people familiar with the matter. That means the Chinese onshore market will be open after the noon SDR valuation in London. China has also begun publishing a yuan reference rate five times a day. The plan is to extend the hours by the end of November, the people said. Further measures related to capital account liberalisation need to be taken.
The Communist Party’s plan for the next five years proposes increasing the yuan’s convertibility in an orderly manner. The PBoC said on October 30 that it will consider a trial programme in the Shanghai free trade zone allowing domestic individual investors to directly buy overseas assets.
“Over time, the PBoC is likely to exit intervention in the foreign-exchange market and make the fixing mechanism more transparent and market-oriented,” said Wang Ju, a Hong Kong- based senior currency strategist at HSBC Holdings. “A more flexible exchange-rate regime will help China allocate its capital more efficiently and gradually move to a more balanced economy.”