|Kwao Peppeh |||Jun 18, 2015 07:32 AM EDT|
(Photo : Reuters/Stringer/Files) Major members of the European Union such as the United Kingdom and Germany are amenable to adding the Yuan to the IMF's basket this year.
Since the beginning of the month, a team of experts from the International Monetary Fund (IMF) have been in China to assess whether the yuan should finally be added to the organization's basket of currencies with Special Drawing Rights (SDR). While the government and central bank officials have expressed optimism about the prospects of the renminbi's inclusion, the questions remains about whether the currency will meet the IMF's requirements to be included in its SDR basket this time around.
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China's economy has grown rapidly over the past few decades to compete with the US economy. Many experts have noted that the sheer importance of China's economy to the global market today warrants the inclusion of the yuan into the basket of currencies with SDR.
The IMF developed the SDR in 1969 as an international reserve asset that members of the organization can claim in times of need. Currently, there are only four currencies in the SDR basket - the US dollar, the euro, the British pound and the Japanese yen.
The IMF reviews the composition of the SDR basket every five years to ensure it reflects the global economy. As the world's second largest and fastest-growing major economy, many experts say the Chinese yuan should be in the IMF's basket of currencies with SDR.
The IMF has two basic requirements for assessing whether a currency should be added to its SDR basket; the country's should exports rank among the top four in the world and the currency must be 'freely usable.'
When China sought to get the yuan added to the SDR basket in 2010, the country met the first requirement but failed to satisfy the latter. Now, as the yuan is being reviewed for the second time, the question lingers about whether the yuan is more internationally accessible today.
Recently, the People's Bank of China revealed that foreign central banks had up to 667 billion yuan ($107 billion) at the end of April. In a bid to meet the IMF's requirements, China's central bank has also vowed to open the doors for foreign investment into the country and also permit foreign investors to sell yuan-dominated debt in the country, according to the Wall Street Journal. Authorities have also vowed to ease the limitations on local companies from investing overseas.
Experts have forecasted outbound investment from China to soon exceed capital inflow into the country. Reports indicate that in the first nine months of 2014, outbound investment from the country increased by up to 21.6%, compared to the same period in 2013. Chinese authorities, who are working with the IMF to assess the yuan's preparedness to be included in the SDR basket, have noted that the government is committed to instituting reforms to accelerate the accessibility of the yuan in international markets.
The inclusion of the yuan into the SDR basket is not only going to make it easier for Chinese investors to do business abroad and vice versa, it will also encourage more nations to include the yuan in their foreign reserve.
Although the IMF will formally announce the result of their review later in the year, Zhu Min, IMF Deputy Managing Director, has revealed that the provisional results of the review will be available by next month, according to China.org.cn.
If the IMF decides to add the yuan to its SDR basket, it would cement the place of China's economy in the world today. However, should the organization decide to refuse the yuan for a second time, it would play into the hands of the US and other opponents of the yuan's inclusion in the SDR basket. Many experts agree that it is not a matter of whether it will happen, but when the IMF will agree to include the yuan into its SDR basket.
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