Adding renminbi to special drawing rights reserve currencies would be internationalization milestone

The internationalization of China's currency has made rapid progress in recent years and the yuan may reach another international milestone if it joins the International Monetary Fund's basket of reserve currencies, analysts say.

The IMF's review of the basket's currencies, which takes place every five years, is expected to announce on Nov 4 if the yuan is to be included.

The central banks of many IMF member countries hold this basket of reserve currencies - known as Special Drawing Rights - as a part of their national reserves. It currently comprises the US dollar, the euro, pound sterling and the Japanese yen.

Duncan Innes-Ker, the regional editor for Asia at the Economist Intelligence Unit, says the inclusion of the yuan into SDR would be a way for China to benchmark the currency's internationalization progress.

"It is like an athlete winning a medal. The winning of the medal is the symbolic event, but the benefits for his performance and body come from the hard work done in the run up to that achievement," he says.

According to the IMF, there are two main criteria for SDR inclusion: the country must be a major exporter and the currency must be freely usable. There are no disputes about China being a major world exporter, but the second criterion presents a problem.

Innes-Ker says: "The RMB is now very widely used and forms a part of many countries' reserve currencies. However its usage as a currency in foreign-exchange transactions outside trade is not so great. This could be used to support the argument that it is not freely used."

One event that has cast shadows over the yuan's possible inclusion in SDR is its 3 percent depreciation in August, the single biggest drop since 1994.

Andrew Carmichael, a partner at the law firm Linklaters, says the inclusion of the yuan into SDR means central banks would need to take the currency into account for reserves purposes and would need access to it for purchases, sales and hedging of transactions in SDRs, leading to an increased and institutionalized demand for the yuan.

However, some experts believe that addressing China's domestic economic challenge to be a greater priority.

Wang Tao, chief China economist of UBS, says domestic growth and financial stability should not be compromised in the race for internationalization. "As the Chinese economy becomes bigger and increasingly integrated into the world economy, the RMB will be increasingly used for trade and investment, and more people would want to hold RMB assets, and it will internationalize.

"It is better for China to keep the liquidity in its domestic economy for now, and build up a better functioning financial market and clean up bad debt problems before fully opening up capital account," she says.

cecily.liu@chinadaily.com.cn