Why the West should welcome Chinese yuan’s inclusion into the SDR

The International Monetary Fund is now conducting a review to consider including the RMB in the basket of Special Drawing Right (SDR) currencies and will make a final decision at the end of the year.

At issue for the review is whether the RMB is a ‘freely or widely used currency’ in trade and financial transactions. Since the last SDR review in 2010, the IMF has been contemplating an explicit criterion-based approach in determining a currency’s eligibility for the SDR basket.

In particular, the focus seems to have shifted to whether a currency can perform as a reserve asset currency. Indicators such as foreign exchange turnover, availability of interest rate instruments, and derivative products for hedging central bank reserves have become important variables for this year’s assessment.

While the IMF decision in 2010 to reject China’s request to include the RMB in the SDR may have had some valid reasons, the evidence this year could have turned in China’s favour. Since July 2009, China has launched an initiative to encourage the RMBs use in international trade and finance.

Yet whether the RMB achieves SDR status is basically irrelevant – no one actually operates in SDRs. But what is crucial is the status, as it will further drive financial liberalisation in China and that is of enormous import. For both China’s domestic economic health and the structural balance of the global economy, the west should be doing all it can to ensure the RMB is in the basket. It would be counter-productive to thwart it.

The RMB is now the second largest global trade financing currency, the fifth largest global payment currency and the 10th largest foreign exchange turnover currency, according to estimates by Bank for International Settlement in 2013.