A win for Beijing as IMF eyes yuan for global role

Later this year the IMF might include the Chinese yuan in its official basket of reserve currencies, a political and economic triumph for Beijing in the teeth of US opposition, but slowing growth in China is likely to limit the impact of the victory.

Adding the yuan to the dollar, euro, yen and pound in the Special Drawing Rights (SDR) basket, as International Monetary Fund head Christine Lagarde says is only a matter of time, should expand its role as a currency for international trade and investment and make central banks more likely to hold it in reserve.

That in turn should lower transaction costs, exchange risk and borrowing costs for China, already the world's largest trading nation, and its companies.

Fresh from its success in drawing member countries to a new China-led development bank, Beijing would also enjoy another victory over Washington, which opposes early inclusion of the yuan in the SDR and sees China as a nascent rival for influence over global financial architecture.

But rather than enjoying a rally in the yuan after months of softness, as some analysts have speculated, markets might find little has changed. That is in part because the yuan is unlikely to receive an allocation in the SDR of more than the 10 per cent individual share that the British pound and Japanese yen each have, perhaps amounting to just US$31 billion, says Chi Lo, economist at BNP Paribas in a research note.

It is also because Beijing, though it is under pressure to widen the yuan's trading band and ease restrictions on cross-border capital flows to meet IMF tests for accessibility that it flunked last time it was under consideration, is unlikely to go too fast down the path of reform.