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China’s subscription to the IMF’s Special Data Dissemination Standard (SDDS), and measures to narrow the gap between on-shore and off-shore RMB values are part of its effort to qualify for the SDR basket, say analyst

WASHINGTON. — The International Monetary Fund (IMF) executive board plans to discuss and decide in November whether to include the Chinese currency, the RMB, into its Special Drawing Rights (SDR) currency basket.

In view of China’s recent financial market reforms and the internationalisation of the RMB, experts believed it was very likely that the RMB would become the fifth currency in the SDR basket.

The IMF Board is expected to rely on its staff explanations of steps China has taken to make “the RMB freely usable”, when it meets to discuss and decide whether to include the RMB in the SDR basket in November, Meg Lundsager, former US executive director on the IMF executive board and now a research fellow at the Wilson Centre, told Xinhua.

“Overall, China’s progress in internationalising the RMB will likely lead the IMF Executive Board to approve the RMB’s inclusion in the SDR basket of currencies,” Lundsager said.

According to Lundsager, if the RMB is included, it means China needs to carry out reforms to further improve its financial markets, which will benefit Chinese consumers and producers.

In fact, China’s reform pace has never stopped. China has opened its inter-bank bond market and forex market to overseas financial institutions and has been promoting data transparency.

At the same time, the internationalisation of the RMB has been making progress. The RMB became the fourth most-used world payment currency in August, overtaking the Japanese yen, statistics from the global transaction services organisation the Society for Worldwide Interbank Financial Telecommunication (SWIFT) showed.

“China is going all out to address as many concerns that have been raised in the report as possible,” said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics (PIIE), a Washington DC-based think tank.

The “report” mentioned by Lardy is an initial SDR review prepared by the IMF staff in August, which looked into the internationalisation of the RMB as well as related progresses and concerns in China’s financial market reforms.

China has taken measures to improve its foreign exchange rate formation system, open up its interbank bond and forex markets, and improve data transparency by subscribing to the IMF’s Special Data Dissemination Standard (SDDS), which were all mentioned in the report, according to Lardy.

“I think it’s quite likely when the vote occurs sometime next month that the RMB will become the fifth currency in the basket,” said Lardy.

During Chinese President Xi Jinping’s visit to the Untied States at the end of September, the US side reiterated its support for the inclusion of the RMB in the SDR basket.

Edwin Truman, another PIIE expert and former US Treasury official, told Xinhua that the US means “exactly what it says”.

“If the IMF staff conclude that the RMB is eligible, the US will support the inclusion. At this point I think that there is a high probability that the recommendation will be to include the RMB in the basket,” said Truman.

According to Truman, China’s subscription to the SDDS and measure to narrow the gap between on-shore and off-shore RMB values were part of its effort to qualify for the SDR basket.

The IMF reviews the currencies in the SDR basket every five years, which currently includes the US dollar, Japanese yen, British pound and the euro, and whether to add the RMB to the basket is a major issue for this year’s assess- ment.

This year’s review is expected to be completed in November 2015 when the IMF board will decide whether the RMB will be included in the SDR basket or not. — Xinhua.