China's yuan nearly "freely usable": central bank's Yi

WASHINGTON Sun Apr 17, 2011 2:56pm EDT

Yuan banknotes are seen in this picture illustration taken in Beijing November 1, 2010. REUTERS/Petar Kujundzic

Yuan banknotes are seen in this picture illustration taken in Beijing November 1, 2010.

Credit: Reuters/Petar Kujundzic

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WASHINGTON (Reuters) - China's yuan is close to being a freely usable currency, one of two key tests for it to be included in the International Monetary Fund's currency basket, the deputy governor of China's central bank said on Sunday.

The most widely used emerging market currencies should be considered for the basket, Yi Gang, deputy governor of the People's Bank of China told reporters.

He was speaking on the sidelines of a twice-yearly meeting of the International Monetary Fund where expanding the IMF's so-called Special Drawing Rights was discussed.

"The most obvious candidates are the BRICS," Yi said, referring to Brazil, Russia, India, China and South Africa.

He added that the Chinese yuan is "very close to being freely usable."

The SDR now comprises the dollar, euro, yen and sterling and is a synthetic quasi-currency that is mainly used as an accounting tool for the IMF's internal operations.

Some experts believe the SDR could increasingly play a role akin to that of a global reserve currency.

Expanding the SDR basket would help support global growth, reduce imbalances and provide a financial safety net during times of financial troubles, Yi said, adding it would also make the international monetary system more representative.

Yi emphasized that a currency that is freely usable may not necessarily be "freely convertible," pointing to currencies that joined the SDR basket in the 1960s and 1970s.

The other criteria for a currency to be included in the SDR basket is that the country must be a major exporter and China fully satisfies this requirement, Yi said.

Adding the yuan to the basket would be a recognition of China's growing economic clout. It could also be a way of encouraging Beijing to speed up reform of its foreign exchange system.

Some countries, especially the United States, have been frustrated with the slow pace of the yuan's appreciation, saying its low value unfairly helps China's exporters. Those calls were repeated at the IMF meetings this weekend.

The IMF completed its latest SDR review in November and did not open it up to any new currencies. It said the Chinese yuan was not used widely enough be to included in the SDR basket.

China has promoted the international use of the yuan in the past two years, highlighted by the rapid development of the Hong Kong offshore yuan market. Earlier this year, state-owned Bank of China Ltd. offered yuan trading to its U.S. customers.

Cross-border yuan transactions are growing rapidly. The BRICS' development banks agreed in principle on Thursday to establish mutual credit lines denominated in their currencies, not dollars, to strengthen business and trade ties.

Yi said China is not in a hurry to have the yuan included in the IMF basket. Chinese officials have repeatedly said Beijing will take steps to make the yuan more flexible but reforms will be carried out in a gradual manner.

The IMF is due to conduct its next review in 2015. Some analysts, such as Jim O'Neill, chairman of Goldman Sachs Asset Management, speculated that the IMF might not wait until then to change the SDR's make-up.

(Editing by William Schomberg)

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Comments (1)
SeniorMoment wrote:
The IMF basket of currencies should only include currencies whose price is determine soley by the market As long as China persists in working to set the price of its currency, it should not be included.

The big idea behind the IMF in the first place is to be able to counter speculative runs on currencies and currencies that the supply of can grow unchecked by demand.

If China lets its currency float it makes sense to include it in currency reserves and baskets of currency, but not otherwise.

Because of China’s one child policy though China does face a future huge demand for imports to provice for its elderly population. Some mechanism needs to be invented that allows China to save on global markets for that future needs in an orderly way. China logically should be investing in economies with growing populations and adequate domestic resources as a way of providing for its coming outsized elderly population percentage.

Apr 17, 2011 8:59pm EDT  --  Report as abuse
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