The Chinese yuan is poised to enter the International Monetary Fund’s big league of global currencies after the Fund’s staff as well as chief Christine Lagarde gave the move the thumbs-up on November 13. As the IMF is wrapping up its twice-a-decade review of the composition of the benchmark Special Drawing Rights (SDR) basket, the yuan is all set to make the cut at a meeting of the IMF executive board, which represents 188 member nations, planned for November 30.
Created in 1969, the SDR basket refers to supplementary forex reserve assets maintained by the IMF. 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 the renminbi or the “people’s currency”) a global currency.
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.
The yuan going global, for sure, has significant implications for the Gulf countries. 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 Cooperation 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.
The yuan was created after World War II, but for years it could be used only domestically in the Communist-controlled nation. But longer term, the IMF approval for the currency could support President Xi Jinping’s drive to open up the world’s second-biggest economy.
In a turbulent year for China’s economy, marked by slowing growth, a tumbling stock market and global turmoil following the devaluation of the yuan in August, the SDR inclusion would be a major milestone in a decades-long ascent toward international credibility for the yuan.
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 currency overnight to challenge the dollar (some 87% of forex trading involves the dollar, according to the Bank for International Settlements), but the nod would be a symbolic boost to the yuan’s international standing, giving countries more confidence to add it to their reserves.