This is an interesting article send to us by our friend Peter Brandt. It is an interesting update on what is happening with the IMF and its decision on whether to include the Yuan in its SDR basket.

Click here to visit the Straits Times website.

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IMF staff seek to put off move to add yuan to IMF’s benchmark currency basket until after September 2016

The International Monetary Fund should put off any move to add the yuan to its benchmark currency basket until after September 2016, IMF staff said in a report which showed a mixed performance of the yuan on meeting key financial norms.

The report, published on Tuesday, comes after Beijing launched a major diplomatic push for the yuan to be added to the IMF’s Special Drawing Rights basket as part of its long-term strategic goal of reducing dependence on the dollar.

The IMF board is scheduled to make a decision in November on whether to include the yuan in a basket of currencies comprising dollars, euros, pounds and yen, although the decision could be pushed back if policymakers decide they need more information.

Delaying any change for nine months through September 2016 would avoid disrupting financial market trading on the first day of the new year, the report said. A senior IMF official said reserve asset managers would need about six months notice to adjust to a change.

The yuan meets the requirements as a significant currency in terms of international trade, but also has to be judged to be “freely usable”.

The delay would also mean China will keep the yuan pegged to the US dollar into 2016, analysts said. It is around 6.2 a US dollar since March.

“It is possible that China may continue to hold the yuan stable into next year given the push out of likely SDR entry date,” Nomura Holdings Inc strategists Craig Chan and Wee Choon Teo wrote in a note.

The de-facto peg to the US dollar has made the yuan the best performer in emerging markets over the past three months, helping stem capital outflows as Chinese policymakers seek to arrest a US$4 trillion (S$5.5 trillion) stocks rout. Inclusion in the IMF’s SDRs would attract as much as US$1 trillion from abroad into China’s bond market over five years, Standard Chartered estimated in May.

The report said the yuan meets the requirements as a significant currency in terms of international trade, but also has to be judged to be “freely usable”, or widely used to make international payments and readily traded on foreign exchange markets. It shows a mixed performance on financial criteria. Although the currency is increasingly used in cross-border transactions and heavily traded in Asia, it is only thinly traded in North America and is not commonly used in international debt securities.

Data was missing for some variables, the report said.

The senior IMF official said there was no set checklist of indicators to guide the decision and no “off-on” switch on whether the yuan would make the grade at the planned review. But he said politics would play no role in the decision which will govern the mix of currencies that countries like Greece receive as part of disbursements from the IMF.

“They should be able to use it directly or they should be able to sell it immediately,” the official said.

Analysts interpreted the IMF delay differently, with some inferring the IMF wanted to see a more freely traded yuan before including it as a reserve currency.

Others said the delay seemed technical, aimed at giving the market more time to prepare. “The IMF article implies a large likelihood of SDR inclusion – otherwise the technical preparation would not be necessary,” UBS economist Wang Tao said in a note to clients.

IMF managing director Christine Lagarde has said adding the yuan to the basket is a “question of when”.

European members of the Group of Seven major industrialised economies – Germany, Britain, France and Italy – favour adding the yuan to the basket quickly. Japan, like the United States, is more cautious, officials have said.