When the International Monetary Fund (IMF) next revises its Special Drawing Right (SDR) basket in September 2016, China would very much like its currency to be included in that basket. Since that inclusion would confirm the Chinese renminbi’s status as a major international reserve currency alongside the U.S. dollar, the euro, the Japanese yen and the British pound sterling. However, it is far from clear whether the Chinese currency is at present a “freely useable” currency as required by the IMF for SDR inclusion or whether it will become one by the time that the IMF completes its SDR basket review next year.
Two considerations make it unlikely that the Chinese renminbi will qualify for inclusion in the SDR basket. The first is that while China’s currency is being increasingly used abroad, China maintains an extensive system of capital controls that limits its convertibility. Not only does China severely restrict the ability of domestic residents to move funds abroad, but it also maintains an extensive control system on capital entering the country. That has to raise fundamental questions as to whether it is a freely useable currency.
The second consideration is that, in the wake of the bursting of its credit bubble and of the small August 2015 currency devaluation, the Chinese balance of payments has considerably weakened and is more than likely to continue to weaken in the months ahead. In this context, it has to be of concern that over the past 12 months, China has experienced massive capital outflows totaling some $500 billion. It also has to be of concern that the pace of those outflows has picked up markedly following the August devaluation.
Full text of this article can be found at TheHill.com.
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