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  November 23rd, 2015 | Written by

China’s RMB May Soon Join IMF Currency Basket

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  • Joining IMF Special Drawing Rights (SDR) basket could increase demand for China’s currency.
  • IMF found RMB is widely used for international transactions and widely traded in exchange markets.
  • France and Britain have pledged their support for adding the RMB to the SDR basket.
  • The U.S. has said it would back the RMB’s SDR inclusion if it met IMF criteria.

China’s currency moved closer to joining other top global currencies in the International Monetary Fund’s Special Drawing Rights (SDR) basket after IMF chief Christine Lagarde gave the thumbs-up to the conclusions of an IMF staff report.

That recommendation means the issue will be taken up by the IMF executive board, which has the final say, to place the renminbi (RMB) on a par with the U.S. dollar, Japanese yen, British pound and euro in the SDR basket. A board meeting is for November 30.

Beijing which has long campaigned for joining the SDR basket, which could increase demand for the RMB among reserve managers.

The IMF staff found the RMB widely used for international transactions and widely traded in major foreign exchange markets, Lagarde said.

“I support the staff’s findings,” she added.

The executive board, which represents the fund’s 188 members, is seen as unlikely to go against the staff recommendation. France and Britain have already pledged their support for the change, which would take effect in October 2016.

The United States, the IMF’s biggest shareholder, has said it would back the RMB’s inclusion if it met the IMF’s criteria. A U.S. Treasury spokesperson said the department would “review the IMF’s paper in that light.”

China has rolled out a series of reforms to liberalize its markets and to help the RMB meet the IMF’s criteria, including eliminating a ceiling on deposit rates, issuing three-month treasury bills weekly, and improving the transparency of Chinese data.

The intervention to stem a stock market plunge last summer, and an unexpected devaluation of the RMB in August, raised some doubts about Beijing’s commitment to reforms. Economists want China’s central bank to reduce the frequency of market interventions.

If the RMB wins 70 percent or more of IMF board votes, it will be the first time the number of currencies in the SDR basket has been expanded. The basket determines the composition of loans made to countries such as Greece.

Still, it will probably take some time before the RMB rivals the dollar’s dominant role in international trade and finance. China’s capital control policies limits foreigners from buying RMB-denominated assets and places restrictions on how much cash residents can take out of the country. Those measures, along with concerns that the RMB will come under depreciation pressure, are disincentives from holding RMBs.

The People’s Bank of China says it is committed to extending the country’s economic reforms. “The inclusion of the RMB in the SDR basket,” the bank said in a statement, “would increase the representativeness and attractiveness of the SDR, and help improve the current international monetary system.”