The renminbi has a good chance of inclusion in the IMF’s basket of currencies following the international body’s revised implementation schedule, according to Standard Chartered.
While the International Monetary Fund’s move this week has been seen in a negative light by many, it could pave the way for a more realistic renminbi inclusion timetable.
On Tuesday (August 4) the IMF announced that at a July 29 meeting it had discussed postponing a possible inclusion of the renminbi into its special drawing rights (SDR) basket of currencies. The possible inclusion was originally slated for December 31 this year, but the meeting discussed postponing it until September 2016. A decision has not yet been reached on this point.
The IMF board is expected to decide on this later this month, and a formal board meeting will be held later this year to decide on whether the renminbi can join the SDR basket.
Standard Chartered’s Hong Kong-based senior rates strategist Becky Liu said that the meeting has been misinterpreted, and a delayed implementation date actually made renminbi inclusion a more realistic prospect.
“We believe some media reports have misinterpreted the release by judging that the RMB is unlikely to be included due to the wording of ‘postponing’ the changes of the basket,” Liu said.
Liu pointed out that “the only thing being postponed is the effective date of the new basket, not the time of formal review”.
“If anything, we believe this is a positive sign that the RMB has a good chance to be included this year,” said Liu.
The current SDR basket – which includes the dollar, euro, British pound and Japanese yen – expires at the end of 2015. The IMF’s board is set to decide this month whether to extend the current basket until the end of September 2016.
That proposal is based on feedback from SDR users – such as central banks – who have indicated to the IMF that including a new currency in the basket would not be easy to implement on the first trading day of the calendar year, which they would need to do if the current basket expired at the end of the year and the renminbi was included in a new basket.
“Whether the RMB is included in October or June is highly uncertain,” said Larry Hu, Macquarie’s head of China economics. “The timing of the review has not changed, the timing of implementation has probably changed. They will probably implement next year”.
Liu added that “the formal review is not being postponed, which suggests that a decision will still be made by the end of this year”.
There are two criteria for inclusion, namely whether the country is an export gateway and its currency is freely usable.
China passed the export gateway criteria at the time of the IMF’s last SDR review in 2010. Since then its share of world exports of goods and services has increased from an average of 8.1% between 2005-2009 to 11% in 2010-14, according to the IMF paper released on Tuesday this week. As Hu puts it, the size of China’s economy means that the IMF “cannot ignore China”.
When it comes to whether or not China’s currency is freely usable, the IMF has pointed to the need for a suitable RMB/dollar exchange rate to be available in Western times zones and regular short-dated treasury-bill issuance by China’s Ministry of Finance as well as highlighting the People’s Bank of China’s July 14 reform package which opened up access to China’s onshore interest rate markets.
“China’s monetary system today is not an interest rate-based system, it is a quantitative-based system,” said Hu, referring to the fact that China’s authorities attempted to fix both the exchange rate and interest rates, rather than let one float and fix the other. The problem is that doing so can only be achieved by placing controls on capital movements in and out of China.
“China wants to move to a more interest rate – or price-based – liquidity system instead of a quantitative system,” said Hu. He sees “a long negotiation process” regarding the freely usable criteria. “Even if the IMF includes the renminbi into the SDR it will not because China is as open as the US or Europe but because it is gradually opening,” he added.
The IMF briefing noted that the “ultimate assessment” of whether or not the renminbi is freely usable will involve a “significant element of judgement”.