Move over dollar – Yuan may join IMF’s SDR basket

March 16, 2015 11:47 AM (UTC+8)

 

A Chinese  tremblor may soon rattle the international monetary order and the dollar may never be the same.

Citibank predicts in a recent report that the yuan will be accepted by the International Monetary Fund into its Special Drawing Rights or SDRs – the IMF’s “supranational” global currency, though the yuan isn’t likely to be made fully convertible when the body votes on the matter in November this year.This will be an important step in the direction of the internationalisation of the yuan, says the March 12 Citi report. China’s government has long desired the step and it represents  a potentially significant shake-up of the present global monetary order.

Reflecting China’s surging economic clout, the yuan will be the first non-convertible currency used to value the SDRs (the other currencies are the dollar, euro, yen and pound). As Citibank writes: “We may soon be in a world where the (yuan) becomes a reserve asset – which would happen by definition if it becomes part of the SDR – without being freely convertible. In other words, the concept of a reserve asset will no longer be “one size fits all.”

Currently,  central banks can’t include yuan holdings in their foreign exchange reserves. However, via inclusion in the SDR basket, the currency will effectively enjoy a “back door” where convertibility is concerned. The upshot, according to Citibank, means increased yuan demand from central banks and further integration of the currency into global capital market flows.

Importantly, China has espoused an “internationalisation” of reserve currencies away from U.S. dollar hegemony and dependencies on local economic fluctuations on exchange rates and stability. The yuan inclusion in the basket would be a step towards a more multi-lateral currency world. While full convertibility may still be far away, China’s ability to have a global reserve currency may soon be upon us.

On the other hand, the expected results of the IMF vote in November casts doubts on China joining the global currency devaluation party any time soon. The yuan’s value is predicted to remain relatively stable through 2015: “The stability of the nominal exchange rate is an important ingredient in China’s pitch to establish the (yuan) as a trustworthy medium of exchange and store of value at the international level”. Furthermore, devaluation might raise the ire of U.S. politicians claiming unfair trading practices as they have in the past to block China’s increased voting share in the IMF. China will therefore continue to prefer to stimulate the economy through its particular brand of quantitative easing, i.e. internal liquidity measures, for instance, via banking and property sector stimulus along with subsidised reforms in credit, as seen in the recent large scale municipal debt swaps.

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