SDR inclusion expected to help yuan become international reserve currency
China's volatile stock markets will not affect the International Monetary Fund (IMF)'s assessment of whether to include the yuan in its Special Drawing Rights (SDR), or reserve currencies, IMF Managing Director Christine Lagarde said Wednesday.
The government has rolled out measures to stabilize the stock market in the past few weeks. Lagarde said that "no one should be surprised" that the Chinese government wants to maintain an orderly market, U.S. news portal CNBC reported.
Lagarde's remarks came after media reported that the IMF was set to hold a meeting on Wednesday to discuss whether to include the yuan in the SDR, which is now composed of the US dollar, Japanese yen, euro and British pound sterling.
Earlier media reports have said that the IMF was scheduled to start discussions in the second half of the year and decide in November.
Chinese experts said there's a good chance the IMF will approve the inclusion of the yuan in its SDR.
The IMF could not be reached for comment as of press time.
Experts said that the yuan is now very close to becoming a reserve currency, which China sees as a major step to boost the yuan's international credibility.
"It would be a mistake if the IMF turns down the yuan, given China's increasing influence on the global economy as well as the wider use of the yuan in international trade," Xu Hongcai, director of the Economic Research Department at the China Center for International Economic Exchanges, told the Global Times on Wednesday.
But he added the yuan's approval as a reserve currency may come with conditions as restrictions remain in China's capital accounts. In the beginning, China's share in the SDR may not fully represent its accounts in the global economy and trade, and the share may be increased later with the further opening-up of China's financial markets, he said.
Created by the IMF in 1969, the SDR is neither a currency nor a claim on the IMF. An SDR represents a claim to foreign currencies for which it may be exchanged in times of need, which means the SDR can be used as a foreign exchange reserve asset.
The IMF reviews the SDR's composition every five years. China failed in its attempt to get the yuan included in 2010 because the IMF said the yuan did not meet the "freely-used" criterion, even if the currency was already widely used in global trade.
Xu said that China owns the largest share of world trade and is an increasingly important player in global affairs, and the current SDR composition does not fully reflect the status of the emerging economy.
China's total foreign trade reached $4.3 trillion in 2014, up 3.4 percent on a yearly basis, making the country the largest goods trader for the second consecutive year, customs data showed.
The Chinese government has hastened efforts to boost the yuan's internationalization. The State Council, China's cabinet, said Friday that the country will further widen the fluctuation range of the yuan's exchange rate to support its trade sector.
Lagarde told media in March that it was a question of when - not if - China's yuan would be included in the SDR. In May, the IMF said that the yuan is no longer undervalued, also a sign that the currency is only steps closer to join the SDR.
Besides, China's efforts to fully liberalize the interest rates and its financial markets have also make it more possible for the yuan to be included in the SDR, experts said.
Lian Ping, chief economist at the Bank of Communications, said that becoming an SDR could help the yuan achieve international reserve currency status, which is held by central banks to pay off international debt obligations.
The four currencies in the SDR are all widely traded currencies and comprise the majority of global international currency reserves, experts said.
Making the yuan a reserve currency, which could boost its international use, could also help promote financial reforms in China and also benefit China's exporters as well as firms which want to expand overseas, experts said.
Liu Ying, a research fellow at the Chongyang Institute for Financial Studies of the Renmin University of China, said that more currencies in the SDR could make the international financial scheme more balanced and reduce the risks of crises.
But Liu also said that uncertainty remains. The U.S. and Japan have a combined voting power of 23 percent in the IMF while China only has 3.82 percent, Liu said. A change in the SDR structure may require 70 percent of the voting powers in the IMF, media reports said.
