China's currency
to have 10.92% weighting, topping yen, pound. Lagarde says China's currency
meets `freely usable' standard
The IMF will add the yuan to its
basket of reserve currencies, an international stamp of approval of the strides
China has made integrating into a global economic system dominated for decades
by the U.S., Europe and Japan.
The International Monetary Fund’s
executive board, which represents the fund’s 188 member nations, decided the
yuan meets the standard of being “freely usable” and will join the dollar,
euro, pound and yen in its Special Drawing Rights basket, the organization said
Monday in a statement.
Approval was expected after IMF
Managing Director Christine Lagarde announced Nov. 13 that her staff recommended inclusion, a position
she supported.
It’s the first change in the SDR’s
currency composition since 1999, when the euro replaced the deutsche mark and
French franc. It’s also a milestone in a decades-long ascent toward
international credibility for the yuan, which was created after World War II
and for years could be used only domestically in the Communist-controlled
nation. The IMF reviews the composition of the basket every five years and
rejected the yuan during the last review, in 2010, saying it didn’t meet the
necessary criteria.
“The renminbi’s inclusion in the SDR
is a clear indication of the reforms that have been implemented and will
continue to be implemented and is a clear, stronger representation of the
global economy,” Lagarde said Monday during a press briefing at the IMF’s
headquarters in Washington. Renminbi is the currency’s official name and means
“the people’s currency” in Mandarin; yuan is the unit.
The Chinese Yuan’s Journey to Global Reserve Status:
A Timeline - The addition will take effect
Oct. 1, 2016, with the yuan having a 10.92 percent weighting in the basket, the
IMF said. Weightings will be 41.73 percent for the dollar, 30.93 percent for
the euro, 8.33 percent for the yen and 8.09 percent for the British pound. The
dollar currently accounts for 41.9 percent of the basket, while the euro
accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.
The yuan weakened in offshore trading
Tuesday amid speculation China’s central bank will rein in intervention now
that the IMF vote on reserve-currency status is out of the way. The long-term
goal is for very few interventions, People’s Bank of China Deputy Governor Yi
Gang said at a briefing, adding that bigger two-way fluctuations are normal.
In a preliminary report in July, IMF
staff estimated the yuan would have a weight of about 14 percent to 16 percent.
The weighting will affect the interest countries pay when they borrow from the
IMF. It may also affect the scale of inflows the Chinese currency receives in
the coming months.
The decision establishes the yuan as
a fixture in the very international monetary system Chinese leaders criticized
following the global financial crisis. In a landmark 2009 speech,
PBOC Governor Zhou Xiaochuan argued a global system so reliant on a single
currency -- the U.S. dollar -- was inherently prone to shocks. That conviction
set off a global push by China’s leaders, including now-President Xi Jinping,
to have the yuan included in the SDR, which countries can use to supplement
their currency reserves.
The IMF staff recommendation was
based on increasing international use and trading of the yuan, policy reforms
that allow yuan to be used smoothly in SDR operations, and steps by China to
step up data disclosure, the fund said. A more detailed staff report will be
released later Monday or Tuesday, IMF officials said.
“It’s a big win for Beijing as they
look to bolster their image and to get the respect they think they deserve,”
said Timothy Adams, president of the Institute of International Finance and a
former U.S. Treasury undersecretary.
The IMF endorsement is a bright spot
in what has been a tumultuous year for the world’s second-biggest economy,
which has been buffeted by slowing growth, a tumbling stock market and a shift
by authorities toward a more market-oriented exchange rate.
The IMF’s decision is a “win-win”
for both China and the world and acknowledges China’s achievements in economic
development and reform, the PBOC said in a statement on its website. The U.S.
supported the fund’s staff recommendation to add the yuan, the Treasury
Department said in an e-mailed statement without elaborating.
Approval is unlikely to have much
impact on short-term demand for the yuan, given the SDR’s minor share of
global reserves, according to economists at banks including HSBC Holdings Plc
and ING Groep NV. Adams said that rising demand may be “evolutionary” and “a
process that will likely be pronounced.”
The decision should boost efforts by
Xi to open up China’s financial markets. China implemented a series of reforms
to win IMF support, such as opening its onshore bond and currency markets to
foreign central banks and reporting its reserves to the IMF.
G-20 Host
The question is whether China, which
will host meetings of the Group of 20 economies next year, will try to leverage
the IMF’s support to pursue broader changes to the global monetary system. In
his 2009 speech, Zhou suggested the IMF expand the use of the SDR to tap its
potential as a "super-sovereign reserve currency."
The IMF’s move may also spur
political blowback in the U.S., where Republican lawmakers have blocked efforts
to expand the voting shares of China and other emerging-market economies at the
fund. Senator Bob Casey, a Pennsylvania Democrat, said in an e-mailed statement
that the decision “validates China’s history of cheating on its currency,” a
history that’s hurt jobs and wages in his state.
The Washington-based fund created
the SDR in 1969 to boost global liquidity. Under the Bretton Woods system of
fixed exchange rates, countries pegged their currencies to the U.S. dollar. But
for nations to increase their dollar reserves, the U.S. would have to run
persistent current-account deficits, threatening the value of the greenback.
The SDR addressed this dilemma by
serving as a supplementary reserve asset to augment countries’ gold and dollar
holdings. While the SDR isn’t technically a currency, it gives IMF member
countries who hold it the right to obtain any of the currencies in the basket
to meet balance-of-payments needs.
http://www.bloomberg.com/news/articles/2015-11-30/imf-backs-yuan-in-reserve-currency-club-after-rejection-in-2010
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