Yuan poised to be a global currency, says IMF's Christine Lagarde

PUBLISHED : Sunday, 15 November, 2015, 8:20am
UPDATED : Sunday, 15 November, 2015, 8:20am

China's currency is poised to enter the big league of global currencies, according to the International Monetary Fund.

The body charged with global monetary cooperation have recommended the yuan be included in its Special Drawing Rights (SDR) reserve-currency basket, alongside the US dollar, euro, pound and yen, IMF managing director Christine Lagarde said.

Approval by the fund's board later this month is now all but certain, as major IMF shareholders including the US have said they will support inclusion if the yuan meets IMF criteria.

It would be the first change in the SDR's currency composition since 2001, when the euro replaced the German deutsche mark and French franc.

The Washington-based fund's endorsement would mark a major milestone in a decades-long ascent toward international credibility for the yuan, which was created after the second world war and for years could be used only domestically.

Approval would bolster President Xi Jinping's drive to keep opening up the world's second-largest economy.

Inclusion would also brighten a tumultuous year for China's economy, which has been hit by slowing growth, a tumbling stock market and a shift by authorities towards a more market-oriented exchange rate.

IMF staff members had determined that the yuan met the requirement of being "freely usable", Lagarde said.

"The IMF staff also finds that the Chinese authorities have addressed all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July," Lagarde said, adding that she supported the findings.

This "is a very clear and strong endorsement", said Brendan Ahern, managing director of Krane Fund Advisors LLC in New York. "No hesitation, no ifs, no buts. Very strong recommendation from Christine Lagarde."

"Essentially this is a done deal," said David Loevinger, managing director of emerging-markets sovereign research at asset manager TCW Group in Los Angeles.

The People's Bank of China said it welcomed the IMF staff proposal.

The yuan's inclusion would make the SDR more representative and attractive, enhance the international monetary system "and is a win-win result for China and the world," the bank said in a statement.

Chi Lo, senior economist, Greater China at BNP Paribas Investment Partners said: "It is the start of China's long-term sphere of influence with the yuan acquiring international status."

Lo believed China was ready to reach for the next signpost in its economic maturity and it may expand its debt issuance for cheaper financing as it aims for expansion in infrastructure investments and its "One Belt One Road" project.

Gaining the reserve status would be a crowning achievement in the career of Zhou Xiaochuan, governor of the People's Bank of China.

The banker had called for such reform in the SDR 61/2 years ago, on the back of the global financial crisis, when the over-dominance of the US dollar in global markets was seen to be contributing to global imbalance and market instability.

Zhou had held out the obscure SDR, the IMF's unit of account, as a potential badge of global prestige for China, persuading Communist Party leaders to open up the financial system and set up trading for the yuan around the world.