By Hu Yuwei. Source:Global Times Published: 2015-08-27
The IMF decided recently to extend the current composition of the basket of currencies for its Special Drawing Rights (SDR) until September 30, 2016. The news drew a lot of attention domestically, but for now, patience is what is needed.
As a former economist for the Organization for Economic Co-operation and Development (OECD), I was honored to participate in discussions about certain major international issues and the making of international principles, and I also came into contact with the IMF. As the IMF and OECD are among the top international organizations, there are certain similarities in their internal processes. From my personal experience, the bureaucratic nature of the IMF has probably been a key factor in delaying the yuan`s inclusion in the SDR basket.
Major IMF decisions are generally processed as follows: Staff economists analyze an issue based on principles of prudence, and then generate reports and submit them to the executive board of the IMF for approval. Regarding the report topics, there are two categories. One is routine reporting such as the IMF Global Financial Stability Report, and the other is for reports initiated at the behest of a member country. For the latter, the report`s conclusion is often in agreement with certain initial judgments.
Regarding the yuan`s potential inclusion in the SDR, IMF staff economists released a report on the methodology for SDR valuation on July 16, 2015, which indicated that an extension of nine months would be desirable for adjustment of the basket of currencies. This was exactly what was required by some major members of the IMF executive board - usually representatives from central banks of member countries - and as expected, the proposal was approved.
The international community, including some major IMF member countries, still has some doubts about China`s recent exchange rate reform and the government`s intervention in the domestic stock market. A lack of communication with the international community before, during and after the recent stock market intervention contributed to these doubts.
After the domestic stock market slump in July, the Chinese government took some unconventional measures to stabilize the market, but some IMF officials believed China`s move interfered with the market`s self-correcting mechanisms, affecting the marketization process. Christine Lagarde, managing director of the IMF, later said that the market turmoil would not derail China`s efforts to get the yuan included in the SDR basket, and that China`s economy was resilient and could withstand market volatility. But her wording reflected the cautious attitude among senior IMF officials regarding China`s recent moves to calm the market.
In addition, on August 11, the People`s Bank of China (PBC), the central bank, unexpectedly announced changes to the mechanism for setting the central parity rate of the yuan against the US dollar. The yuan reference rate weakened from 6.1162 on August 10 to 6.2298 on August 11, a drop of 1,136 basis points, and the drop grew to 4 percent after a few days. Although the move was a significant and positive step from the government in making the exchange rate system less rigid, there was still some skepticism in the international community.
For example, a spokesperson for the US Treasury said on August 11 that it was too early to judge the full implications of the change in the PBC reference rate. Meanwhile, a spokesman for the IMF said that China`s move to make the yuan more responsive to market forces was "a welcome step," but noted that "the exact impact will depend on how the new mechanism is implemented."
The US has the largest voting share in the IMF at 16.74 percent, and major amendments in the fund`s policy require an 85 percent majority. Given that allowing the yuan to be included in the SDR basket would undoubtedly fall under the category of "major amendments," the inclusion will require support from the US.
Therefore, the debate over whether the yuan should join the SDR currency basket actually reflects the struggle for control of the international financial order between China and the US, and the US government could use its position of strength within the IMF to bargain with China and further its own national interests.
In all, the bureaucratic IMF and the ambiguous attitude of the US government are the main reasons for the delay in the yuan`s inclusion in the SDR basket.
The author is a research fellow at the macro research department at Chongyang Institute for Financial Studies, Renmin University of China.
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