Currency Calculations
Renminbi Not Ready for Reserve?

An IMF staff report leaked on Wednesday indicates that the Fund has misgivings about declaring China’s renminbi ready for inclusion in the official basket of world reserve currencies (SDR), currently comprised of the dollar, euro, pound, and yen. The IMF reviews the composition of the SDR every five years, and a decision on the renminbi is due later this year. From the FT:

China’s leadership has been pushing for the addition of the renminbi, which would serve as recognition of the currency’s rising global status and a signal to the world’s central banks that renminbi assets are a solid investment. Christine Lagarde, IMF managing director, has said the renminbi’s inclusion is a “matter of when, not if”. […]

“Across a range of indicators, the renminbi is now exhibiting a significant degree of international use and trading. At the same time, the four freely usable currencies (already in the SDR) generally rank ahead of the renminbi,” the IMF staff said in the report.

IMF Director Christine Lagarde has recently indicated that Beijing’s interventions in its volatile stock markets will not influence the decision. China’s conspicuous meddling in its markets has sent ripples through international stock exchanges and raised concerns over the country’s economic outlook.

Though the decision is supposed to be based on technical merits, a political compromise appears to be emerging that gives a nod to U.S. concerns: the IMF may choose not to allow the renminbi in at this review, but could revisit the decision by the end of 2016 rather than waiting until the next scheduled review in 2020. Such a course of action may incentivize China to enact policy reforms that the U.S. is urging, changes that would further liberalize its cross-border investment flows and domestic interest rates.

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