China Research

Chinese statements and domestic debate make increasingly clear that China soon wants to become part of the International Monetary Fund’s (IMF’s) artificial currency, the so-called Special Drawing Rights (SDRs) – also described as kind of reserve currency for the IMF-member countries. Currently, one SDR contains fixed amounts of four currencies denominated in USD, i.e. somewhat above 40 percent for the USD and slightly below 40 percent for the EUR plus around 10 percent for both the GBP and the JPY.

In January 2016, the Chinese want their renminbi (RMB) to become the fifth currency in the SDR basket. The question, however, is whether China already is mature for such a big step. To get there, some main criteria for SDR entry have to be met:

– the size of the country’s exports;

– the currencies included in SDRs should be “widely used” and “widely traded”

The first criterion, of course, would be easily met by China, the no 1 exporting country in the world.

The evaluation of the second criterion with its two parts, however, is much more complicated. One must certainly note the RMB today is widely – and increasingly – used when it comes to international trade finance. Chinese RMB or yuan have also a growing weight in the composition of currency reserves in an increasing number of central banks.

Consequently, the possible membership of the RMB in the SDR composition will probably be decided by the interpretation of the question whether the Chinese currency is “widely traded” – which in my view should be related to free forex trading of all over the world. This is currently not the case. The IMF is talking more precisely about “widely traded in the principal exchange markets” which, however, opens for broad interpretations. As the IMF expressed the issue very recently: the future inclusion of the RMB in the SDR is not a matter of “if” – but of “when”.

Altogether, I feel strongly that joining the SDR by the RMB already in January 2016 would be premature. I share the view that China will be there at some point in the future. Reforms of the domestic financial system and the gradual deregulation of the capital balance seem to be much more important than the RMB’s joining of the SDR already in a couple of months – and not to forget the need of much better transparency. But we know that the Executive Board has the mandate to change the entry criteria, by, for example, giving emerging markets more influence in IMF decisions.

Hopefully, the decision by the Executive Board of the IMF will be based purely on economic, financial and institutional criteria – and not on political considerations. Nota bene: This is no opinion against emerging markets per se which I indeed have sympathized with since many years ago.

Sources:                                                                              http://www.imf.org/external/np/pp/eng/2011/092311.pdf   http://www.imf.org/external/np/exr/facts/sdr.htm

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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