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Support builds up for crucial renminbi move

By JUKKA PIHLMAN (China Daily) Updated: 2015-05-11 13:30

Later this year, the International Monetary Fund will decide whether to include the renminbi in its Special Drawing Rights-a "virtual currency" made up of a basket of other currencies.

If this happens, use of the renminbi would soar around the world. Automatically, all central banks would become holders of the renminbi through their SDR assets, and official reserve currency status would spur central banks that have not already done so to invest part of their reserves in the renminbi.

There would be significant renminbi hedging activity by international institutions such as the African Development Bank and Bank of International Settlements, whose balance sheets of over $300 billion combined are denominated in SDR.

With the IMF's official stamp of approval, there would be a big boost in demand from investors and private companies. One example could be the Basel III Liquidity Coverage Ratio regulation, which requires that high quality liquid assets held by banks be positioned as convertible currencies. Whether or not the renminbi qualifies is up to regulators, but the IMF's decision could play a part in whether it does qualify or not.

The final decision on the currency's inclusion in the SDR will, to a large extent, be political, and, judging by recent indications, it now seems significantly more likely that it will go in the renminbi's favor.

In Europe-whose governments have the largest combined share of the vote at the IMF-the atmosphere is turning increasingly favorable, with Germany declaring officially last month that it supports the renminbi's inclusion in the SDR.

Along with France, Italy, Switzerland and the United Kingdom, Germany has also recently joined the China-proposed Asian Infrastructure Investment Bank as a founding member, in a show of political support for China.

By our estimates, more than $100 billion of central bank reserves are now invested in the renminbi, considerably more than in the Swiss franc, roughly on par with the known amounts of Australian and Canadian dollar investments, and fast catching up with the yen and the pound.

Central banks in Asia and South America, and many in Africa, have been investing in the renminbi for a while, but the recent news that European central banks, including the Bank of England, Banque de France, the National Bank of Hungary and the Swiss National Bank, are following suit shows how rapidly attitudes to the renminbi are changing.

Even the European Central Bank is now considering adding the renminbi to its reserves, according to media reports. This-along with the rapid growth in the use of the renminbi for trade and financial transactions-lends significant weight to the argument in favor of the currency's inclusion in the SDR later this year.

How the United States will play its cards will be interesting-so far, the official statements from Washington have been lukewarm at best. However, it is worth noting that, whereas most big IMF decisions require an 85 percent majority, effectively giving the US a veto, the SDR decision can be made with only 70 percent of the vote, if there's no significant change to the methodology.

If not now, the next SDR review is not till 2020. The IMF can theoretically conduct a review outside of those times, but this would be ill-advised and at odds with the IMF's stated aim to promote broader use of the SDR. Adding additional uncertainty about the timing of an SDR review would seriously hamper the SDR's prospects of becoming anything more than it is today.

By contrast, including the renminbi this year would instantly make the SDR more reflective of the realities of the new world economy in which China is the largest exporter and has the second-largest GDP.

By reducing reliance on the dollar, it would have the added benefit of making the international monetary system more stable.

The author is managing director and head of central banks and sovereign wealth funds at Standard Chartered. The views do not necessarily reflect those of China Daily.

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