As trade denominated in yuan continues to rise at a phenomenal rate, its significance to global markets is quickly increasing. But even as the IMF considers adding renminbi to the basket of SDR reserve currencies and China’s global political clout rises commensurately, the country has yet to fully liberalize its markets—or its currency.
Deutsche Bank’s Goldstein refers to the renminbi’s “de jure, versus de facto” status as a reserve currency. Because of China’s status as the world’s biggest trading nation, governments with big exposure to Chinese imports are covering their risk by building renminbi reserves. Jukka Pihlman, managing director and head of central banks and sovereign wealth funds at Standard Chartered, notes, “There are some countries in Africa where 30%, even 40%, of imports are coming from China. So it just makes a perfect risk-management policy, from the asset-liability perspective, to hold renminbi. There are many other reasons why central banks would invest, but that trade linkage is very clear: China is the largest exporter in the world.”
Multinational embrace of the yuan is a given. A recent survey by law firm Allen & Overy asked multinationals outside of China about their projected use of the currency. Some 50% of executive respondents predicted it would double in five years.
The respondents already showed a high rate of adoption of the renminbi across a broad variety of uses. Forty-five percent of the respondents had used it for cross-border intracompany lending over the past 12 months. But only 21% had done so in the 12 months preceding that. Just under 50% said they had channeled renminbi offshore from China without converting to other currencies over the past 12 months, compared with 21% who said they had been doing this for a longer period. About 49% said they were using renminbi to fund acquisitions. Less than 20% said they had been doing so for longer than the past 12 months.
Five years is clearly too long for the IMF to wait. The pace makes it likely the IMF will give the nod this year—but it is not a certainty. The IMF’s Roache says that, in the case of the renminbi’s internationalization, “the board has cut themselves an awful lot of slack. If they think that a review within five years is warranted by changing international monetary arrangements, then that review will be on the table,” he says.
Standard Chartered’s Pihlman concurs but expresses reservations. “There’s been a lot of conversation [among global and multilateral bankers] about the timing. ‘Why don’t we postpone this current review, and arrange another review in one or two years?’ The board does have that leeway. But I think it would be ill-advised.” He points out that the IMF has been promoting the use of the SDR as an alternative to reliance on the US dollar and is in the midst of a program to expand its use by central banks as a reserve currency. “If you now add an additional uncertainty about the timing of the review, that really is hampering the prospects of the SDR itself,” he adds.
Adding the renminbi to the SDR basket now could have an extra benefit for the currency. “Maybe inclusion of the renminbi in the SDR could make the SDR more usable, and at the same time [the IMF could] use this momentum to … help the SDR develop into a more meaningful instrument,” Pihlman says.
Indications are growing that the decision will be positive. The Wall Street Journal reported on May 5 that the IMF is close to making an official reassessment of the renminbi that would declare it a fair-value currency—i.e. not undervalued, as the US and others argue. The new view would help smooth the way to reserve currency status.