Moves are afoot to include the Chinese renminbi, and possibly other currencies, in the basket used to calculate the IMFs accounting unit, its Special Drawing Rights (SDRs). The move would have big implications for the global economy.
ASEAN+3 finance ministers, meeting in Hanoi yesterday, were briefed by French finance minister Christine Lagarde on an IMF study, drawn up at the request of the G20 under Frances chairmanship, on enlarging the range of currencies in the SDR basket.
Indonesian finance minister Agus Martowardojo, a co-chair of the meeting, told Emerging Markets yesterday: Only strong currencies are included in the SDR dollar, euro, yen and the pound and in the G20 forum we have discussed the possibility of adding more currencies.
He added that some proposals were likely to be made at the G20 finance ministers meeting in November.
The debate is centred on the Chinese yuan more than other currencies. The IMF board last year advised against including the yuan in the SDR basket, but the debate has been reopened in the G20, IMF deputy managing director Naoyuki Shinohara told Emerging Markets.
The US sees inclusion of the yuan in the SDR basket as a way to make the Chinese currency more sensitive to market signals, sources said but China does not want to be trapped into having its currency forcibly appreciated via SDR inclusion.
Lagarde told Emerging Markets: I think the study underway, which is conducted by the IMF, is about what are the criteria and conditions to enlarge the composition of the SDR basket.
Clearly the prime candidate is more likely to be the renminbi than any other currency. But I think that the study is an issue of principle that they are reviewing at the moment, she added.
Asked at a briefing whether the ASEAN+3 ministers had discussed the need to have trade transactions among Asian countries settled in local currencies, Agus said this hinges upon the outcome of discussions within the G20 on monetary reform.
Iwan Aziz, head of the ADBs Office of Regional Economic Integration told Emerging Markets that Malaysia is pushing to have the yuan used as a currency for trade settlements. It is the only south east Asian country that accepts such settlements and is anxious to see others follow suit.
But the prime reason behind the moves to have the yuan included as a component of the SDR is to make the yuan more commercial and its exchange rate more amenable to market signals, he said.
ADB chief economist Changyong Rhee told Emerging Markets: This is the hot topic the French presidency would like to push forward. My understanding is that there is a common understanding to make the yuan an international currency in the sense that it can belong to the SDR basket.
He added I think the Chinese government doesnt mind making the yuan compatible [with the SDR]. But whether they [agree to] the preconditions for the SDR capital account liberalisation or not thats the issue.
Western countries say this should be a precondition, but my understanding is that the Chinese are saying that it shouldnt be. Its premature to say whether its feasible [for this to happen] by November or not. I dont expect itll happen overnight.
Theoretically, inclusion of the yuan in the SDR basket would qualify a Chinese national to be nominated as a candidate for the office of IMF managing director, should that position be opened up to non-European candidates, Aziz confirmed.