Chinese Yuan on Track to Become IMF Basket Currency

It appears likely the yuan will join the International Monetary Fund benchmark currency basket this year, according to sources close to the process.

Reuters reports IMF staff plan to give the all-clear for yuan inclusion, laying the groundwork for a favorable decision by policymakers. Three people briefed on IMF discussions said a draft report from the staff reached a favorable conclusion on including the Chinese currency. One officer said the path forward appears clear:

Everything is on course technically and there is no obvious political obstacle. The report leans clearly towards including the RMB in the (basket) but leaves the decision for the board.”

The IMF Special Drawing Rights basket is currently comprised of the US dollar, euro, yen, and British pound. The SDR basket was created in 1969 to increase global liquidity. IMF member countries can use any of the currencies in the basket in order to meet balance-of-payment needs. Including the yuan in the basket would elevate the currency significantly. Currently, it is valued based on the weighted rate of the four current SDR basket currencies.

As Reuters points out, China has been striving hard toward inclusion:

Beijing is pushing for the yuan to join the Special Drawing Rights (SDR) basket as part of its long-term strategic goal of reducing dependence on the dollar and to mark the country’s coming of age as an economic power.”

As part of that push, the Chinese have aggressively added to their gold reserves. China has steadily increased its holdings of the precious metal since announcing the size of its stash for the first time since 2009 in July. Many analysts believe one reason the Chinese have increased their gold holding is to stabilize the yuan, raising the likelihood that the IMF will include the currency in its SDR basket.

Earlier this month, the yuan overtook the Japanese yen to become the fourth most-used currency for global payments. The news signaled China’s growing stature on the world stage.

Inclusion in the IMF basket would reap significant benefits for China, according to a Bloomberg report:

At least $1 trillion of global reserves will migrate to Chinese assets if the yuan joins the IMF’s reserve basket, according to Standard Chartered Plc and AXA Investment Managers. Foreign companies’ issuance of yuan-denominated securities in China, known as panda bonds, could exceed $50 billion in the next five years, according to the World Bank’s International Finance Corp.”

China is clearly on the path toward becoming a major player on the world economic stage. It is notable that increasing its holdings of gold makes up an important part of its strategy.

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