Call for more capital account convertibility before yuan joins IMF’s SDR currency basket

International Monetary Fund will meet in November to vote on whether mainland currency can join next year

PUBLISHED : Thursday, 15 October, 2015, 1:28pm
UPDATED : Thursday, 15 October, 2015, 2:22pm

A senior banker has shot down the notion of the yuan joining the International Monetary Fund’s basket of reserve currencies next year.

The regional head of Citi Treasury and Trade Solutions, Amol Gupte, speaking on Thursday during a panel discussion by some the world’s top experts on the internationalisation of the yuan, said mainland China’s capital account should be opened further before the yuan is added to the special drawing rights (SDR) basket of currencies.

“I’d like to see much more capital account convertibility before it becomes a reserve currency,” Gupte said on the panel at Sibos, a conference put on by SWIFT.

“Only when you can get out do you want to get in,” he said in reference to the ability to buy or sell the currency freely, a point crucial to decision making at central banks when buying reserve currencies.

The IMF will meet in November to vote on whether the yuan joins the basket next year, a step considered to be a major step in the internationalisation of the yuan. SDR currencies are widely bought by central banks as reserve currencies.

Only when you can get out do you want to get in
Amol Gupte

Even if the yuan joined the SDR basket, it was unlikely that would change the composition of central bank reserves, Gupte said.

Gupte’s point of view contrasted sharply with the three other experts on the panel, who all said the yuan should join the basket.

Chen Wen Yi, deputy general manager of global trade services at Bank of China, said that adding the yuan was logical because it had overtaken Japan’s yen in terms of trade finance.

He said Beijing wanted the yuan to join the SDR basket because central banks around the world would then be obliged to use it as a reserve currency.

The president and chief executive of HSBC China, David Liao, said that while there were still some outstanding technical issues, such as the difference in price between onshore and offshore yuan, the addition of the currency to the SDR basket would help lubricate global trade as more banks and traders look to use the currency for trade finance.

Andrew Sheng, a distinguished fellow at the Asia Global Institute, said rejection of the yuan by the IMF in November could have dire consequences.

As one of the few major countries to have a trade surplus, support from China could be needed if the world experienced another financial crisis, he said. Without the yuan included in the basket, it would be difficult for China to provide the resources.

“I would be very worried if the RMB does not join the SDR club in 2016,” Sheng said.