International Monetary Fund representatives have told China that the yuan is likely to join the fund's basket of reserve currencies soon, according to Chinese officials with knowledge of the matter, a move that may make more countries comfortable using the unit or including it in their foreign-exchange holdings.
The IMF has given Chinese officials strong signals in meetings that the yuan is likely to win inclusion in the current review of the Special Drawing Rights, the fund's unit of account, said three people who asked not to be identified because the talks were private. Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people.
The Washington-based lender is reviewing the composition of the basket, with staff members due to present their recommendation to the fund's executive board for a vote as soon as next month as part of a process scheduled for every five years. The board rejected including the currency following the last review, in 2010, concluding that the yuan didn't meet the test of being "freely usable."
Winning the IMF's endorsement would validate efforts by President Xi Jinping to push through policies aimed at making the world's second-biggest economy more market oriented, boosting China's prestige as it prepares to host Group of 20 gatherings next year. At least $1 trillion of global reserves will convert to Chinese assets if the yuan joins the IMF's reserve basket, according to Standard Chartered Plc and AXA Investment Managers.
"Prospects for approval seem to be favorable," said Otaviano Canuto, executive director at the IMF for 11 countries including Brazil. The story "is going in the direction of the renminbi becoming a necessary component of the SDR," he said, referring to the currency's official name.
The People's Bank of China's move in August toward a more market-determined exchange rate was a "positive signal," as was the sale this week in London of yuan-dominated bonds, Canuto said in an interview in Washington. The executive board still needs to consider the final report on the review by IMF staff, he said.
Board Discussions
Preliminary discussions by the executive board on the issue are pointing toward approval, said two other people familiar with the matter who asked not to be named. The board has requested that IMF staff members look into some of the operational challenges of including the yuan in the basket, such as the ability of the fund's 188 member nations to quickly convert SDRs into yuan, according to one of the people.
The Chinese officials familiar with the matter spoke before the nation took another step toward liberalizing its financial system on Friday, as the PBOC removed the cap on deposit rates. That move was paired with cuts in interest rates and banks' reserve requirements.
"We realize that although we've done a lot, it's really first up to the staff, and second up to the board, to make a final judgment," Jin Zhongxia, China's representative to the IMF executive board, said in an interview Friday. "We have to fully respect their decision." While he's hopeful the board will approve the yuan's inclusion, Chinese officials are being cautious in promoting their case, Jin said.
