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 The recommendation paves the way for the Fund's executive board,
which has the final say, to place the yuan <CNY=CFXS> <CNY=> on a
par with the U.S. dollar <.DXY>, Japanese yen <JPY=>, British pound
<GBP=> and euro <EUR=> at a meeting scheduled for Nov. 30.
Joining the Special Drawing Rights (SDR) basket would be a victory
for Beijing, which has campaigned hard for the move, and could
increase demand for the yuan among reserve managers as well as
marking a symbolic coming of age for the world's second-largest
economy.
Staff had found the yuan, also known as the renminbi (RMB), met the
criteria of being “freely usable,” or widely used for international
transactions and widely traded in major foreign exchange markets,
Lagarde said.
“I support the staff’s findings," she said in a statement
immediately welcomed by China's central bank, which said it hoped
the international community would also back the yuan's inclusion.
Staff also gave the green light to Beijing's efforts to address
operational issues identified in a report in July, Lagarde said.
The executive board, which represents the Fund's 188 members, is
seen as unlikely to go against a staff recommendation and countries
including France and Britain have already pledged their support for
the change. This would take effect in October 2016, during China's
leadership of the Group of 20 bloc of advanced and emerging
economies.
China has rolled out a flurry of reforms recently to liberalize its
markets and also help the yuan meet the IMF's checklist, including
scrapping a ceiling on deposit rates, issuing three-month Treasury
bills weekly and improving the transparency of Chinese data.
Economists said with the yuan's inclusion in the IMF basket as a
reserve currency now looking like a formality, China should step up
efforts to build trust between global investors and its policy
makers.
China's heavy-handed intervention to stem a stock market rout over
the summer, and an unexpected devaluation of the yuan in August, had
raised some doubts about Beijing's commitment to reforms.
Singapore-based Commerzbank economist Zhou Hao said China needs to
further accelerate domestic reforms and improve policy transparency.
"The PBOC should reduce the frequency of market intervention,
allowing market forces to really play a critical role."
The United States, the Fund's biggest shareholder, has said it would
back the yuan's inclusion if it met the IMF's criteria, a U.S.
Treasury spokesperson said, adding: "We will review the IMF’s paper
in that light."
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If the yuan's addition wins 70 percent or more of IMF board votes,
it will be the first time the number of currencies in the SDR basket
- which determines the composition of loans made to countries such
as Greece - has been expanded.
"I would say that the likelihood of China's yuan joining the IMF
currency basket this year is very high," said Hong Kong-based Shen
Jianguang, chief economist at Mizuho Securities Asia.
"The only thing that could deter this is if the U.S. led a group
rejecting the yuan's inclusion, which could complicate things. But
the United States' current official stance doesn't reflect such an
attitude," he said.
Some currency analysts say making the yuan the fifth currency in the
basket could eventually lead to global demand for the currency worth
more than $500 billion.
But China's extensive capital controls mean it would take a while
before the yuan rivals the dollar's dominant role in international
trade and finance, analysts say.
Its closed capital account still limits foreigners from buying
yuan-denominated assets and places caps on how much cash residents
can take out of the country. These restrictions, along with concerns
that the yuan is set to come under steady depreciation pressure, may
cause corporates to back off from holding yuan.
Nonetheless, the People's Bank of China said the IMF statement was
an acknowledgment of the progress China had made in reforms and
opening up its economy.
"The inclusion of the RMB in the SDR basket would increase the
representativeness and attractiveness of the SDR, and help improve
the current international monetary system, which would benefit both
China and the rest of the world," the PBOC said in a statement.
China would respect the board's decision and continue to deepen
economic reforms, the PBOC said.
(Additional reporting by Timothy Ahmann in Washington, Jason Subler
in Beijing and Brenda Goh in Shanghai; Editing by James Dalgleish &
Shri Navaratnam)
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