Yuan Loses Out: IMF Freezes Benchmark Currency Basket

The International Monetary Fund said on Wednesday it will freeze its benchmark currency basket until October 2016, giving markets more time to adjust to the possible addition of China’s yuan as part of a review of global reserve currencies.

The IMF board is scheduled to decide in November whether the yuan will join the Special Drawing Rights basket.

Beijing loosened government controls on the yuan this month, allowing its value to fall sharply. The IMF saw the policy shift as a step toward a freer exchange rate, potentially setting the stage for the yuan to become part of the SDR basket.

The decision announced in a statement on Wednesday, however, would defer the implementation of any move to include the yuan.

Beijing, keen for its currency to have equal billing with the euro, yen, pound and dollar, has been pushing for the yuan to be included in the SDR basket, which determines the mix of currencies that countries like Greece receive as IMF disbursements.

The United States, which is the IMF’s largest shareholder, has not said if it will support the yuan’s inclusion. China’s currency policies have been a bugbear between the two countries since China devalued the yuan in the 1990s and unleashed a flood of exports to the United States.

This month’s yuan devaluation could help China’s slowing economy but raised hackles from U.S. manufacturers.

To be included in the SDR basket, IMF policymakers must decide the yuan is “freely usable,” or widely used to make international payments and widely traded in foreign exchange markets.

An IMF staff report released earlier this month, which recommended extending the basket, showed that although the currency is increasingly used in cross-border transactions and heavily traded in Asia, it is only thinly traded in North America and is not commonly used in international debt securities.

Staff said freezing the current basket, which had been due to expire on Dec. 31, would avoid disrupting financial market trading on the first day of the new year and give parties more lead time to adjust to any changes.

Chinese Premier Li Keqiang in March asked IMF Managing Director Christine Lagarde to push for inclusion, saying Beijing would speed up the convertibility of the yuan and liberalize cross-border investment rules.

Lagarde has said adding the yuan to the basket is a “question of when.”


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell