IMF should include the yuan in its Special Drawing Right

Kevin Carmichael

Washington— Globe and Mail Update

A proxy of the currencies that matter is the International Monetary Fund’s Special Drawing Right, or SDR, whose value is determined by a basket that includes the dollar, the euro, the pound and the yen.

Towards the end of last year, the fund opted to leave the composition of the SDR unchanged. That decision surprised some. Given China’s dominance of world trade, it seemed logical to include the yuan in the group. There was some speculation in foreign exchange markets that the newly strong Canadian dollar might be added.

A new report by the IMF suggests that it will be only a matter of time before the fund gets itself a bigger basket. The paper is called “Enhancing International Monetary Stability – A Role for the SDR?” and was released Thursday in conjunction with a discussion on the international monetary system at IMF headquarters in Washington.

The paper makes specific mention of the debate over including the yuan, also called the renminbi, in the SDR basket. The yuan was excluded because the Chinese government strictly controls the number of renminbi allowed to circulate outside the county. To be in the SDR basket, a currency is supposed to be “freely usable.”

But IMF staff members are now questioning whether that needs to be the case. The report notes the Chinese government is slowly allowing more non-residents, including central banks, to hold yuan-denominated deposits. The gradual development of renminbi derivatives in Hong Kong could, eventually, help deal with technical issues related to hedging exposure to currencies in the SDR basket – key if the SDR is to have a bigger role in foreign-exchange markets, as some, including IMF Managing Director Dominique Srauss-Kahn, would like.

Why does this matter? Including the Chinese currency in the SDR basket is seen as a way to coax the government into playing a bigger role in the international monetary system. It was China’s central bank governor who rekindled interest in the SDR by musing in 2009 that the IMF’s unit of exchange could be used to help calm volatility in currency markets. The inclusion of the yuan in the SDR basket could also be an important step in convincing private investors to take SDRs seriously because they would offer a means to get exposure to the Chinese currency.

The SDR was conceived in 1969 as an international currency, but never got off the ground. Have times changed? Stay tuned: we’re about to find out.

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