IMF report recommends delaying yuan’s SDR entry

The International Monetary Fund (IMF) should put off any decision to add the yuan to its basket of reserve currencies, the Special Drawing Rights (SDR), by nine months, an IMF staff report said, a move to reduce uncertainty and give SDR users adequate time to prepare for the possible inclusion of the Chinese yuan. Experts said it also gives the yuan a chance to further adjust to prepare for the changes. According to a report published on the IMF's website Tuesday, the organization is discussing the proposal of expanding the current SDR from the end of this year to September 2016. The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves. There are four currencies in the current SDR basket - the US dollar, the euro, the British pound and the Japanese yen - which are all widely traded currencies. Since the Chinese yuan is likely to be included in the SDR during the IMF reviews later this year, the proposal is "in response to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year and facilitating the continued smooth functioning of SDR-related operations," Siddharth Tiwari, director of the IMF's Strategy, Policy and Review Department, said in the report. "To a certain extent, the delay in the adoption is meant to urge China to speed up its capital accounts liberalization once the yuan is approved as a reserve currency," Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times on Wednesday. Every five years, the IMF reviews the SDR composition, which opens up a window for additional currencies, and 2015 is a review year, Tiwari said. The IMF's Executive Board will formally hold a review toward the end of the year. Although China failed in its attempt to get the yuan included in the SDR in 2010, experts generally believe that there is a good chance that the IMF will decide to include the yuan in its SDR this year. According to Xu Hongcai, director of the Economic Research Department at the China Center for International Economic Exchanges, the yuan is very close to meeting the SDR criteria. "So far, the only key issue is whether the yuan is a freely usable currency by IMF standards," Xu told the Global Times on Wednesday. A freely usable currency is one which is widely used to make payments for international transactions and is widely traded in the principal exchange markets, according to the IMF definition in its report. It does not necessarily need to be fully convertible. The IMF report said the yuan has made "substantial progress" since the 2010 review. It is one of the most-traded currencies in Asia, and increasingly used in Europe though still low, and its use in North America is "thin." "Even if the IMF includes the yuan in the SDR, there's still much work to be done considering the remaining restrictions in China's capital accounts," Xu added. "For instance, tight restrictions remain on foreign investment in Chinese mainland securities markets." Zhou said he's concerned that the volatility in mainland stock markets may have held back efforts to open up the country's capital accounts. The bearish performance of China's A-shares have left investors wondering whether there was any non-market factor behind the recent plunge. Chinese securities regulators temporarily blocked 38 accounts from trading for abnormal trading behavior that may have had an impact on stock prices, and one of the accounts is owned by global hedge fund Citadel Global Trading, according to media reports. "The plunge in share prices in the stock markets exposed vulnerabilities in market supervision and regulation. Without a sound regulatory mechanism, opening up capital accounts would lead to a lot of problems," Zhou said. But Xu appears more optimistic, saying that the impact of global hedge funds on the stock markets is limited, and will not cause much trouble with proper supervision. "There's no need to be concerned about opening up. We can still take various steps like tax measures to deal with the flow of hot money that may affect our financial stability," Xu said. "It is still possible to control the risks by strengthening supervision over capital flows even in fully liberalized capital accounts." China's volatile stock markets will not affect the IMF's assessment of whether to include the yuan in its SDR, IMF Managing Director Christine Lagarde said last month.