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The International Monetary Fund is expected to admit China’s renminbi to its elite basket of reserve currencies on Monday in what would be a major vote of confidence in Beijing’s economic reforms and its bid to internationalise its currency.
Confirming China’s place at the top table of the world’s economies, the IMF’s shareholders are set to vote overwhelmingly to include the renminbi as the fifth member of the basket used to value the fund’s own de facto currency, the “special drawing rights”.
The move comes at a crucial time for China, which is managing a significant slowdown in growth and has suffered deep falls in financial markets as questions have mounted over the leadership in Beijing’s response and commitment to reforms.
But Monday’s vote by the IMF’s board will also come amid questions over just how much the IMF has been forced to bend its own rules to make the case for the renminbi and accommodate China at a sensitive time in the relationship between the fund and Beijing.
“They are stretching their criteria,” said Edwin Truman, a former US Treasury official and longstanding watcher of the IMF at the Washington-based Peterson Institute for International Economics.
Eswar Prasad, a former head of the IMF’s China team, said that had the IMF review been applied to any other currency, the case would probably not have been made for inclusion in the SDR basket. Becoming part of the SDR basket is largely symbolic, but membership is limited to easily traded large currencies that are widely used by central banks to hold foreign exchange reserves.
“It is very clear that [IMF staff and management] were willing not to break the rules but to bend them,” Mr Prasad said. “Given how much the IMF needs China they did not have much choice.”
With China the world’s largest economy, measured by purchasing power parity, the fund would lack global legitimacy without giving a leading role to Beijing.
Several western diplomats in Beijing have said the renminbi’s inclusion in the SDR basket was a heavily political decision and that the Chinese government had been very effective at lobbying countries to support the inclusion regardless of whether the currency met the requirements or not.
However, the IMF’s management insists that its review of the case for including the renminbi was purely “technical” in nature and focused on practical issues of whether the renminbi could be used in IMF transactions with its members.
“There is no politics in this,” said a senior IMF official.
IMF officials and major shareholders all argue that China’s pursuit of SDR inclusion has already delivered major reforms. If anything, they contend, the campaign has strengthened the hand of reformers within China and locked in important changes.
The IMF’s staff earlier this month recommended in a report to the fund’s board that the renminbi join the dollar, euro, British pound and Japanese yen in the SDR basket as part of a regular five-yearly review.
The staff’s findings hinged on the renminbi meeting two criteria. The first is that China and the renminbi have a significant role in global trade, a bar which Beijing passed years ago. But the second — that the renminbi be both widely used and “freely usable” internationally — has proved more contentious.
In a number of the measures that ascertain how widely it is used — such as its use in central bank foreign exchange reserves and in international debt markets — the renminbi fell below the Australian and Canadian dollars, neither of which is a member of the SDR basket.
Moreover, some of the measures that China has introduced to make the renminbi “freely usable” for other IMF members — such as allowing access to its domestic bond market and giving the market a greater role in setting the daily trading range for the currency — have been introduced only in recent months and remain largely untested.
Critics such as Mr Truman argue that the IMF has also made a series of concessions to China in recent months linked to the SDR decision that have been focused mainly on maintaining good relations with Beijing. That has proved particularly important at a time when China is frustrated with the stalling in the US Congress of 2010 reforms to the IMF’s shareholding structure and has begun creating alternative institutions to the fund and the World Bank.
Among these IMF moves was a decision earlier this year to drop the categories of “advanced” and “emerging and developing” economies in its Composition of Official Foreign Exchange Reserves report after China began reporting its holdings to the IMF. In a recent blog post, Mr Truman said the IMF had “kowtowed before an invisible emperor” with the move and undermined the goal of the project — to increase the transparency of global central bank reserves — by doing so.
The IMF says the Cofer data for individual countries had always been confidential and denies China received any special treatment. The move to drop the Cofer categories was made, it says, because China’s outsize role among emerging markets meant that releasing the category data would have disclosed otherwise confidential information about China’s reserves.
IMF officials also argue that having China report the composition of its reserves to the IMF in itself was a “huge step forward”.
http://www.ft.com/intl/cms/s/0/fd81211a-96a9-11e5-9228-87e603d47bdc.html#axzz3svayf16F
Confirming China’s place at the top table of the world’s economies, the IMF’s shareholders are set to vote overwhelmingly to include the renminbi as the fifth member of the basket used to value the fund’s own de facto currency, the “special drawing rights”.
The move comes at a crucial time for China, which is managing a significant slowdown in growth and has suffered deep falls in financial markets as questions have mounted over the leadership in Beijing’s response and commitment to reforms.
But Monday’s vote by the IMF’s board will also come amid questions over just how much the IMF has been forced to bend its own rules to make the case for the renminbi and accommodate China at a sensitive time in the relationship between the fund and Beijing.
“They are stretching their criteria,” said Edwin Truman, a former US Treasury official and longstanding watcher of the IMF at the Washington-based Peterson Institute for International Economics.
Eswar Prasad, a former head of the IMF’s China team, said that had the IMF review been applied to any other currency, the case would probably not have been made for inclusion in the SDR basket. Becoming part of the SDR basket is largely symbolic, but membership is limited to easily traded large currencies that are widely used by central banks to hold foreign exchange reserves.
“It is very clear that [IMF staff and management] were willing not to break the rules but to bend them,” Mr Prasad said. “Given how much the IMF needs China they did not have much choice.”
With China the world’s largest economy, measured by purchasing power parity, the fund would lack global legitimacy without giving a leading role to Beijing.
Several western diplomats in Beijing have said the renminbi’s inclusion in the SDR basket was a heavily political decision and that the Chinese government had been very effective at lobbying countries to support the inclusion regardless of whether the currency met the requirements or not.
However, the IMF’s management insists that its review of the case for including the renminbi was purely “technical” in nature and focused on practical issues of whether the renminbi could be used in IMF transactions with its members.
“There is no politics in this,” said a senior IMF official.
IMF officials and major shareholders all argue that China’s pursuit of SDR inclusion has already delivered major reforms. If anything, they contend, the campaign has strengthened the hand of reformers within China and locked in important changes.
The IMF’s staff earlier this month recommended in a report to the fund’s board that the renminbi join the dollar, euro, British pound and Japanese yen in the SDR basket as part of a regular five-yearly review.
The staff’s findings hinged on the renminbi meeting two criteria. The first is that China and the renminbi have a significant role in global trade, a bar which Beijing passed years ago. But the second — that the renminbi be both widely used and “freely usable” internationally — has proved more contentious.
In a number of the measures that ascertain how widely it is used — such as its use in central bank foreign exchange reserves and in international debt markets — the renminbi fell below the Australian and Canadian dollars, neither of which is a member of the SDR basket.
Moreover, some of the measures that China has introduced to make the renminbi “freely usable” for other IMF members — such as allowing access to its domestic bond market and giving the market a greater role in setting the daily trading range for the currency — have been introduced only in recent months and remain largely untested.
Critics such as Mr Truman argue that the IMF has also made a series of concessions to China in recent months linked to the SDR decision that have been focused mainly on maintaining good relations with Beijing. That has proved particularly important at a time when China is frustrated with the stalling in the US Congress of 2010 reforms to the IMF’s shareholding structure and has begun creating alternative institutions to the fund and the World Bank.
Among these IMF moves was a decision earlier this year to drop the categories of “advanced” and “emerging and developing” economies in its Composition of Official Foreign Exchange Reserves report after China began reporting its holdings to the IMF. In a recent blog post, Mr Truman said the IMF had “kowtowed before an invisible emperor” with the move and undermined the goal of the project — to increase the transparency of global central bank reserves — by doing so.
The IMF says the Cofer data for individual countries had always been confidential and denies China received any special treatment. The move to drop the Cofer categories was made, it says, because China’s outsize role among emerging markets meant that releasing the category data would have disclosed otherwise confidential information about China’s reserves.
IMF officials also argue that having China report the composition of its reserves to the IMF in itself was a “huge step forward”.
http://www.ft.com/intl/cms/s/0/fd81211a-96a9-11e5-9228-87e603d47bdc.html#axzz3svayf16F
