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 However the United States, where China's growing economic and
political muscle is a source of strategic concern in Congress, is
reluctant to add the yuan so soon to the basket of currencies that
make up the IMF's Special Drawing Rights.
U.S. Treasury Secretary Jack Lew said after a visit to Beijing this
week the yuan was not yet ready to join the virtual currency that
defines the value of the IMF's reserves, used for lending to
countries in financial difficulty.
"While further liberalization and reform are needed for the (yuan)
to meet this standard, we encourage the process of completing these
necessary reforms," Lew said in a speech in San Francisco on
Tuesday.
The yuan, also known as the renminbi or RMB, is already the world's
fifth most-used trade currency. Beijing has made strides this year
in introducing the infrastructure needed to float it freely on
global capital markets.
European members of the Group of Seven major industrialized
economies - Germany, Britain, France and Italy - favor adding the
yuan this year to the basket that comprises the dollar, the euro,
the yen and the pound sterling. Japan, like the United States, is
more cautious, the officials said.
The IMF's board will hold an initial discussion in May on China's
request and a full five-yearly review of the SDR's composition will
be conducted later in the year ahead of a decision expected in
November, IMF officials said.
"The German side supports China's goal to add the RMB to the SDR
currency basket based on existing criteria," Joachim Nagel, a member
of the executive board of the German central bank, said last weekend
at a high-level forum in Boao, on the southern Chinese island of
Hainan.
The upcoming review could be a good opportunity to introduce the
yuan into the basket, he said, adding: "We appreciate China's recent
development and progress towards liberalization."
Chinese Premier Li Keqiang asked IMF chief Christine Lagarde last
month to include the yuan in its SDR basket, pledged to speed up its
"basic convertibility" and said China hoped to play an active role
in international efforts to maintain financial stability, state news
agency Xinhua said.
PHASED ENTRY?
A euro zone central bank source said one route could see a phased
entry into the SDR, linked to fulfilling the official criterion that
the yuan must be "freely usable", which Western officials interpret
as full convertibility.
It would be the first emerging market currency to join the SDR,
marking another stage in China's rise as a global economic player
and requiring the United States to accept a dilution of its
unrivalled power in international finance.
While the Europeans are vying for commercial advantage in the
world's second biggest economy, Washington sees Beijing also as an
authoritarian strategic challenger that may not feel bound by rules
written by the West.
The U.S. Congress has held up ratification of a 2010 reform of
voting rights in the IMF intended to give China and other emerging
economies more say.
 Britain, keen to secure pole position for London as an offshore
center for international trading in yuan, has taken the lead in
pressing publicly for China's admission to the SDR.
David Ramsden, chief economic adviser at the UK Treasury, said much
had changed since the makeup of the virtual currency was last
reviewed in 2010, and including the yuan was now a "very live
issue".
Germany has ambitions to lure yuan trading to Frankfurt, home of the
European Central Bank, and was irked when Britain last month jumped
ahead of its EU partners to become a founder member of the China-led
Asian Infrastructure Investment Bank.
Washington suffered a diplomatic reverse after trying to dissuade
its allies from joining the Chinese initiative, seen as a potential
rival to the World Bank and Asian Development Bank, dominated by the
United States and Japan.
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Keen to avoid a second rift with Europe - even though the United
States can block IMF decisions - Lew focused on the terms for
admitting the yuan to the SDR rather than the timing.
"China will need to successfully complete difficult fundamental
reforms, such as capital account liberalization, a more
market-determined exchange rate, interest rate liberalization, as
well as strengthening of financial regulation and supervision," he
said.
While Washington believed Beijing has stopped intervening to weaken
its currency, Lew said the true test would come when market pressure
increased for the yuan to strengthen.
David Marsh, managing director of the central banking think-tank
OMFIF, sees a "grand bargain" between China, the United States and
the IMF taking shape under which Beijing would enter the heart of
global finance in exchange for turning the yuan into a strong
currency on world financial markets.
The Chinese central bank was using its $3.8 trillion in reserves to
keep the yuan steady against the dollar. The Chinese currency has
appreciated by 11 percent in trade-weighted terms in the past year.
"All of this is a potential challenge for the dollar and its pivotal
position in world money," Marsh said in a briefing.
While there is no fixed set of indicators to measure the eligibility
of a currency for the SDR basket, in 2011 IMF staff set out a number
of indicators that could show whether a currency is "freely usable":
- currency composition of official reserve holdings;
- currency denomination of international banking liabilities; -
currency denomination of international debt securities;
- volume of transactions in foreign exchange spot markets.
More than 60 central banks hold the yuan in their reserves,
according to China-focused bankers in London. Offshore trading in
the yuan <CNH=> soared some 350 percent on Thomson Reuters trading
platforms last year and rival platform EBS said the yuan was one of
its top five traded currencies.
A former high IMF official, speaking on condition of anonymity, said
2015 was too soon for the yuan to qualify, but the Chinese central
bank could use the review to persuade Communist Party leaders to
move further towards convertibility.
Zhu Min, the IMF's Chinese deputy managing director, noted the yuan
was increasingly used in trade and was also growing in capital
markets.
"Clearly the RMB is already qualified, in a sense, on trade
activity," he told reporters at the Boao Forum. "But on the freely
usable side ... there are still some obstructions."
(This story corrects paragraph 18, changing to Asian Development
Bank)
(Additional reporting by Adam Jourdan in Boao, China, Rory Carroll
in San Francisco, Randall Palmer in Ottawa and Patrick Graham in
London; Writing by Paul Taylor. Editing by Mike Peacock.)
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