China moves closer to renminbi inclusion in SDR

Comments by Chinese officials hinting renminbi will be fully convertible by 2015 open door to inclusion of currency in IMF’s special drawing rights basket

Chinese officials have hinted that the renminbi may be fully convertible on the capital account by 2015, paving the way for the Chinese currency to be included in the Special Drawing Rights (SDR).

On Thursday, newswire Bloomberg reported Davide Cucino, president of the EU Chamber of Commerce in China, as saying Chinese officials had told European Union business executives that the renminbi would achieve "full convertibility" by 2015. Similarly, Li Daokui, an adviser to the People's Bank of China (PBoC), was reported on Friday by Reuters as saying it was "quite possible" for China to realise yuan convertibility by 2015.

However, Mark Williams, chief China economist at Capital Economics, a consultancy based in London, said full convertibility was "unlikely" unless the renminbi appreciated closer to its fair market value, and the Chinese government allowed conditions in its banking sector and financial markets to be more open to foreign investment. "Neither seems likely. There is no consensus on the scale of renminbi undervaluation today," Williams said.

Hui Feng, a research fellow at the University of Queensland in Brisbane, said there were conflicting factors shaping the pace of the renminbi's internationalisation. He said that while, on the one hand, the leadership in China was not keen on any radical moves – with a political transition looming early next year – on the other hand, the rise in domestic wages and food prices could propel Beijing to accelerate the revaluation. In addition, greater diversification of China's reserves resulting from the bleak prospect of the US budgetary position could lead to further internationalisation of the renminbi, boosting the chance of early convertibility, Feng told

Full convertibility of the renminbi is a necessary condition if China's currency is to be included in the basket of currencies that comprise the SDR, the International Monetary Fund's in-house unit of account. The SDR, which was valued at 0.6296 SDR against the dollar on Thursday, consists of the euro, yen, pound sterling, and US dollar. The basket composition is reviewed every five years, with the next review coming up in 2015.

However, a panel in July agreed that the Chinese currency was not likely to be included in reweighting of SDR. In particular, Gary Smith, a global head of official institutions at BNP Paribas Group, said that while 2015 would be an important year in the internationalisation of the renminbi, China was unlikely to meet all the requirements to be included in time. "That won't happen," Smith said.

China has taken significant steps to internationalise the renminbi by developing its offshore renminbi market in Hong Kong. In September, the PBoC unveiled a five-step programme in its Financial Stability Report to expanding the cross-border renminbi settlement in an effort to cement its currency in cross-border trade. The central bank has also opened swap lines with a number of central banks.

However, a number of senior financial sector officials, including chief executive of the Hong Kong Exchanges and Clearing, Charles Li, have warned of considerable risks associated with the internationalistion of the renminbi due to the underdevelopment of China's capital markets.

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