Rising yuan use may lift IMF basket prospects

Updated: 2015-10-07 10:49

By Paul Welitzkin in New York(China Daily)

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Rising yuan use may lift IMF basket prospects

A man walks past an advertisement promoting foreign exchange services in Hong Kong last August. Tyrone Siu / Reuters

The yuan's displacement of the Japanese yen as the world's fourth most-used currency is likely to bolster the Chinese currency's admission to the International Monetary Fund's (IMF) Special Drawing Rights basket of currencies, analysts said.

On Tuesday, transaction services provider Swift reported the yuan's new usage ranking.

William T. Wilson, a senior research fellow at The Heritage Foundation in Washington, noted several reasons for the greater use of the yuan: In 2013 China replaced the US as the world's largest trading nation. The yuan, also called the renminbi or RMB, has appreciated in real terms against most currencies the past decade to make it a desirable currency because of its preservation of store of value. And with China now the largest trading partner with 75 nations (many of them in Asia), it is quickly becoming a regional reserve currency.

"These factors all increase the probability the RMB will be included in the IMF (basket) sometime soon - perhaps a year from now. That said, until China removes its restrictions on capital controls, it will never challenge the US dollar as the world's dominant reserve currency," Wilson said in an e-mail to China Daily USA.

China has been waging a campaign to have the yuan included in the IMF's basket of currencies which the organization uses to value reserve assets. The basket includes the dollar, the euro, the British pound and the yen. The IMF may decide in November whether the yuan will join the basket.

"China's goal is to get its currency a much larger reserve currency status - currently quite small despite the enormous trade volumes," wrote Wilson. "Doing this would achieve a number of objectives the US has enjoyed the past 80 years."

"First, the greater use of RMB in international trade would remove much of the exchange rate risk burdened by Chinese exporters. Secondly, it would likely lower the borrowing cost of government entities. A greater acceptance of the RMB globally would likely lower the borrowing cost of sovereign debt," wrote Wilson.

"Growing use of the renminbi for cross-border trade and investment shows that demand isn't simply driven by China's domestic markets but that the currency's becoming deeply embedded into the international economy," Diane Reyes, global head of payments and cash management at HSBC Holdings PLC said in a statement.