Renminbi could still join SDR basket this year

Renminbi2The Chinese currency has a good chance of joining the special drawing rights (SDR) basket this year, and gaining credibility as a major currency, despite apparent hesitationfrom the International Monetary Fund (IMF). Today's surprise announcement by China's central bank, which includes cutting the daily reference rate by 1.9%, its most significant devaluation since the mid-1990s, seems to support China's bid to join the SDR basket. It represents a move towards allowing the level of the currency to be determined by market forces.

Doubts emerged that the IMF, which manages the SDR, would make the decision this year, after an IMF report indicated it would “extend the current SDR basket until September 2016”.

But Aidan Yao, senior emerging market economist at AXA Investment Managers, says it would be the implementation of the decision and not the decision itself that would be delayed.

“We think the renminbi still stands a good chance to be included in the SDR this year – a view not swayed by the recent IMF report,” he says.

The IMF has recognised progress from the Chinese authorities in making the renminbi “freely usable”, a key criterion for inclusion in the SDR, says Yao.

There are still hurdles, such as the lack of a single, reliable foreign exchange rate for the renminbi, uncertainty over interest rates and a shortage of hedging instruments. However, Yao believes the IMF is likely to endorse renminbi inclusion despite these technical challenges.

“That said, although the IMF’s endorsement is important, it’s worth remembering that the actual voting on the SDR, which requires a 70% majority at the executive board, will likely be more political than economic,” he adds. “This makes the IMF’s support a necessary but not sufficient condition for the RMB [renminbi] to cross the finishing line.”

The SDR was established by the IMF in 1969 to supplement member countries' official reserves. Its value is based on a basket of four international currencies, the US dollar, the euro, the sterling and the yen. A review of the currencies in the basket, which takes places every five years, is due this year.

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