China is taking steps to improve the liquidity and transferability of its currency, sometimes even at the cost of short-term harm to the economy, to help its currency to join a key reserve currency basket designed by the International Monetary Fund. But by and large, chances are Beijing would get disappointed this year. Colin Moore, Global Chief Investment Officer of Columbia Threadneedle Investments, sees Beijing unable to meet the criteria for inclusion in the so-called Special Drawing Rights basket for now and its hope to pass the review due by the year-end is quite slim. “Given the importance of China in global trading, it is reasonable for the IMF executive board to consider the currency for inclusion in the basket of currencies used to value SDRs…but it is not clear to me that they currently meet the criteria for inclusion in the SDR,” said Moore. The executive board at the IMF can make the SDR decision with only 70 per cent of the vote, giving hope for China since the US only has 17 per cent of the voting rights. But Moore pointed out that inclusion in the SDR will require 85 per cent of members in the IMF, and therefore the US and Europe still have a lot of bargaining power in the whole review. Moreover, another more important question is whether China’s market reforms have prepared the currency so it can be widely used in global transactions and become freely exchangeable, or as described by the IMF “freely usable”. To Moore, the answer for the near term is no. “I would welcome rather than fear those reforms, but we appear to be a long way from there,” said Moore. “If the Chinese government takes more substantial steps toward making the yuan fully exchangeable rather than just widening the permitted exchange rate bands, allows interest rates to be set by the market, and allows free movement of capital, then we should assume the currency may evolve toward full reserve status over the medium to long term,” he said. The IMF is keen to bring in emerging market currencies in order to boost the usage of the SDRs, which accounts for less than 4 per cent of global reserves and carries little function in the global financial system at this time. To boost usage of the SDRs, IMF will need a currency that is freely accessible in any and all urgent circumstances. Last but not the least, even under a scenario where China gets into the SDR basket, it doesn’t mean that the currency will post a meaningful threat to the US dollar’s position in the global financial market. By no means can it be called a “reserve currency” after joining the basket, according to Moore. “The use of the word ‘reserve’ here is confusing. The SDR’s are supplementary foreign exchange reserves, but must not be confused with the common use of ‘reserve currency,’” said Moore. A true reserve currency, such as the US dollar or the euro, is freely exchangeable and can be used in multiple transactions. SDRs can only be held by central banks, not private corporations or individuals, and can only be exchanged via the IMF’s SDR Department or on a voluntary basis with IMF member countries, he said.