Thursday, January 29, 2015

CNBC: IMF Set for Lively Debate on Adding Yuan to SDR Basket

This new CNBC article provides an update on the prospects for the Chinese Yuan to be added to the SDR currency basket later this year. We identified this last month as potentially one of the biggest monetary issues flying under the radar for 2015. More and more it is showing up on the radar as we see in this CNBC article. First a few quotes, then a comment. Click on the link above to read the full article.


"China is expected to make another push for the inclusion of the yuan in the International Monetary Fund's in-house currency basket in a review later this year - and this time round its G20 partners may be willing to listen."
"U.S. officials say they will wait for an IMF paper on the issue later this year before taking a view, but officials in Asian and other G20 capitals say that, unlike in the review five years ago, the issue will at least be a live discussion."
. . . . 
"The chief argument against its inclusion then in the Special Drawing Rights, a basket of yen, dollars, pounds and euro used as the IMF's in-house unit of account, was that the renminbi was far from freely "usable" or convertible."
"That argument is gradually weakening as yuan offshore trading surges. This month leading currency platform EBS ranked it in its top five most traded currencies."
. . . .
"Harvard University professor Jeffrey Frankel said it was premature to consider the yuan "freely usable" but there may be other political reasons for a change this year."
"The Group of 20 major governments agreed in 2010 to give China and other emerging markets a greater say at the IMF, while reducing the dominance of Western Europe on its board. But those changes have not been ratified by the U.S. Congress."
"I think it is important to acknowledge the rise of China, and let them have a fair, proportionate weight in institutions like the IMF," Frankel said."
"If I were at the top of the IMF or the White House, I might feel that since China cannot be accommodated (with quotas) then we have to accommodate them in this other way (through SDRs), which after all won't do any harm."
My added comment:
We said in our blog article last month pretty much what professor Frankel says in this article. Here is what our blog article said:
A huge key to watch for in 2015: Does the Yuan make it in the SDR basket?   

I think it will because the IMF may be able to do this without the approval of the US Congress and it is a way to pacify the BRICS for not getting the 2010 IMF quota reforms passed. China will very likely overlook that issue if they get the big prize; inclusion of the Yuan in the SDR basket.
This CNBC article says it will require US approval to include the Yuan. I think the US will go along with adding the yuan to the SDR basket for the political reason mentioned by professor Frankel.
If the US does block adding the Yuan to the SDR currency basket on top of not passing the 2010 IMF reforms, that might push China and the BRICS over the edge. They might finally just decide the IMF is not the place to move forward. So how this turns out in 2015 is a big key to watch.

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