IMF’s Lagarde says supports staff proposal to put yuan in currency basket

The governor of Bank Negara Malaysia has earned the praise of the managing director of the worldwide Monetary Fund (IMF), who said she had a solid grasp on Islamic finance.

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The SDR weights are distinctly different from the reserve currency weights indicated by IMF’s Official Foreign Exchange Reserves data, which is closely watched by investors and traders looking for fresh signs of what the global central banks’ actions in the foreign-exchange market.

It will be a win-win result for both China and the world if the RMB could be included in the SDR basket as it will strengthen the SDR’s representativeness and attraction and optimize current worldwide currency system, according to the PBoC authorities.

“The inclusion would boost the status of the renminbi as a reserve currency and help the short-term sentiment”, said Larry Hu, head of China economics at Macquarie Securities Ltd.in Hong Kong. China obviously meets the export requirement given it is the world’s largest exporter, however there are still many question marks around the yuan’s usability, despite making huge strides over the years.

That said, Washington has previously indicated support, saying in September that it backs the yuan’s inclusion provided it meets the existing criteria.

In August, China announced it would allow its currency to adjust in line with market forces, a move that effectively devalued the yuan.

The SDR is effectively a basket of “reserve” currencies constructed, reviewed and weighted by the International Monetary Fund every five years, with the Dollars now commanding a 41.9% weighting, Euro 37.4%, GBP 11.3% and JPY 9.4% within the SDR basket.

Seen as the leading currencies of worldwide trade, the SDR basket is now made up of the dollar, euro, Japanese yen and the British pound.

It now looks that the yuan will be formally admitted to the IMF’s SDR currency basket by the end of the month, marking a milestone in China’s efforts to become a global economic power.

“We hope the RMB’s inclusion in the SDR basket will be supported by the worldwide community”, the PBOC said, adding that “China will continue to deepen economic reforms and promote financial opening up”.

A research note published by Mizuho Securities Asia on November 2 said convertibility of the yuan will incorporate capital account liberalization, offshore circulation, interest-rate liberalization and a more flexible exchange-rate mechanism.