Traders work at the Bank of Montreal (BMO) trading floor in Toronto, March 24. Canada's export agency signed a deal with China's biggest bank on Monday to promote the use of the yuan as a settlement currency in trade-related transactions, as officials in Toronto launched the first yuan trading hub in the Americas. — Reuters
BRUSSELS — China is closer to joining the major league of reserve currencies with a deal possible later this year to include the yuan in the International Monetary Fund's unit of account, international finance officials say.
However the United States, where China's growing economic and political muscle is a source of strategic concern in Congress, is reluctant to add the yuan so soon to the basket of currencies that make up the IMF's Special Drawing Rights.
US Treasury Secretary Jack Lew said after a visit to Beijing this week the yuan was not yet ready to join the virtual currency that defines the value of the IMF's reserves, used for lending to countries in financial difficulty.
“While further liberalization and reform are needed for the (yuan) to meet this standard, we encourage the process of completing these necessary reforms,” Lew said in a speech in San Francisco on Tuesday.
The yuan, also known as the renminbi or RMB, is already the world's fifth most-used trade currency. Beijing has made strides this year in introducing the infrastructure needed to float it freely on global capital markets.
European members of the Group of Seven major industrialiZed economies —Germany, Britain, France and Italy —favor adding the yuan this year to the basket that comprises the dollar, the euro, the yen and the pound sterling. Japan, like the United States, is more cautious, the officials said.
The IMF's board will hold an initial discussion in May on China's request and a full five-yearly review of the SDR's composition will be conducted later in the year ahead of a decision expected in November, IMF officials said.
“The German side supports China's goal to add the RMB to the SDR currency basket based on existing criteria,” Joachim Nagel, a member of the executive board of the German central bank, said last weekend at a high-level forum in Boao, on the southern Chinese island of Hainan.
The upcoming review could be a good opportunity to introduce the yuan into the basket, he said, adding: “We appreciate China's recent development and progress toward liberalization.”
Chinese Premier Li Keqiang asked IMF chief Christine Lagarde last month to include the yuan in its SDR basket, pledged to speed up its “basic convertibility” and said China hoped to play an active role in international efforts to maintain financial stability, state news agency Xinhua said.
A euro zone central bank source said one route could see a phased entry into the SDR, linked to fulfilling the official criterion that the yuan must be “freely usable”, which Western officials interpret as full convertibility.
It would be the first emerging market currency to join the SDR, marking another stage in China's rise as a global economic player and requiring the United States to accept a dilution of its unrivalled power in international finance. While the Europeans are vying for commercial advantage in the world's second biggest economy, Washington sees Beijing also as an authoritarian strategic challenger that may not feel bound by rules written by the West. The US Congress has held up ratification of a 2010 reform of voting rights in the IMF intended to give China and other emerging economies more say. Britain, keen to secure pole position for London as an offshore center for international trading in yuan, has taken the lead in pressing publicly for China's admission to the SDR.
David Ramsden, chief economic adviser at the UK Treasury, said much had changed since the makeup of the virtual currency was last reviewed in 2010, and including the yuan was now a “very live issue”.
Germany has ambitions to lure yuan trading to Frankfurt, home of the European Central Bank, and was irked when Britain last month jumped ahead of its EU partners to become a founder member of the China-led Asian Infrastructure Investment Bank.
Washington suffered a diplomatic reverse after trying to dissuade its allies from joining the Chinese initiative, seen as a potential rival to the World Bank and Asian Investment Bank, dominated by the United States and Japan.
Keen to avoid a second rift with Europe — even though the United States can block IMF decisions — Lew focused on the terms for admitting the yuan to the SDR rather than the timing.
“China will need to successfully complete difficult fundamental reforms, such as capital account liberalization, a more market-determined exchange rate, interest rate liberalization, as well as strengthening of financial regulation and supervision,” he said.
While Washington believed Beijing has stopped intervening to weaken its currency, Lew said the true test would come when market pressure increased for the yuan to strengthen. — Reuters
