Group of Seven (G-7) countries started out with a tough-love approach to China's pursuit of reserve-currency status for the yuan: Take the difficult steps, and we'll support you. As the decision nears, the united front may be softening.
The International Monetary Fund (IMF) is reviewing whether the yuan should be included in its Special Drawing Rights (SDR), a basket of reserve currencies used by the fund as a unit of account. While many analysts have predicted approval, a unified G-7 would have the power to block inclusion, denying China the global prestige of standing alongside the dollar and euro in the basket.
At a May meeting of G-7 finance chiefs in Dresden, Germany, German Finance Minister Wolfgang Schaeuble said the group welcomed the yuan's inclusion "in principle" as long as the decision aligns with IMF standards. Individual nations' recent comments have taken on different shades of favorableness toward approval.
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U.S. Treasury Secretary Jacob J. Lew has put the onus on China to prove the yuan belongs, saying the country needs to further liberalize its currency policy and complete financial reforms before it can get the IMF's nod. He has also said countries shouldn't prejudge the outcome of the review, which is due to be considered by the fund's executive board in November. Japan is waiting to see what IMF staff recommend, according to a person familiar with the matter who asked not to be identified.
"If they make the kinds of reforms that they have committed to and indicated they are prepared to make, there's an openness to a positive outcome of the review," Lew said Sept. 5, almost a month after China suddenly allowed the market a greater role in setting the yuan's value and triggered its biggest loss in two decades.
Other nations are sending warmer signals. In a speech Tuesday in Shanghai, U.K. Chancellor of the Exchequer George Osborne called for a "golden decade" in relations between the U.K. and China. Osborne said he'd like to see the yuan added to the IMF basket as the currency becomes increasingly important in global markets and "meets existing IMF criteria."
French Finance Minister Michel Sapin said last week in Beijing that France favors including the yuan in the SDR basket, though China still needs to meet the IMF's technical requirements first, according to Francois Coen, Sapin's spokesman.
"My sense is the major European powers will likely be supportive," while the U.S. and Japan are more likely to resist, said Nicholas Consonery, Asia analyst at the Eurasia Group, a research and consulting firm in New York.
Whitney Smith, a U.S. Treasury spokeswoman, declined to comment beyond referring to previous remarks by Lew.
Winning the IMF's endorsement would validate efforts by President Xi Jinping, who meets Thursday and Friday in Washington with President Barack Obama, to push through financial reforms aimed at making the world's second-biggest economy more market-oriented. At least US$1 trillion of global reserves will convert to Chinese assets if the yuan joins the IMF's reserve basket, according to Standard Chartered Plc and AXA Investment Managers.
In a report last month, IMF staff said the yuan trails its global counterparts in major benchmarks and that "significant work" in analyzing data is needed before deciding whether to grant reserve-currency status. In addition to the dollar and euro, the SDR basket also includes the pound and yen.
While IMF staff may make a recommendation, the final decision rests with the executive board, which represents the fund's 188 member nations. The U.S. and Japan control about 23 percent of the board votes—not enough to veto yuan inclusion on their own because the decision probably will require approval of 70 percent of the fund's voting power. The pair would need at least two of the other five G-7 nations to exceed the 30 percent threshold needed to block such an action.
Though there's broad consensus within the G-7 that China has more work to do, countries are divided over how to use the IMF review as a diplomatic tool, Consonery said. The U.K. and Germany are looking to establish London and Frankfurt as leading hubs for yuan trading, he said. On Monday, the People's Bank of China said it plans to sell yuan-denominated debt in London, the first issuance outside the country.
"The Chinese government's ability to steer renminbi-related transactions and business to specific financial centers has allowed them to play off different members of the G-7 against each other," said Eswar Prasad, a Cornell University professor and former head of the financial-studies and China divisions at the IMF. Renminbi is the currency's official name and yuan is the unit.
The G-7 has a common interest in using China's SDR bid as a catalyst for liberalizing China's financial system, he said by email. "The U.S., in particular, is keen to see that this prize is not given away prematurely as it represents an important opportunity to push forward financial-sector and other market-oriented reforms in China," Prasad said.
–With assistance from Mark Deen in Paris and Margaret Talev in Washington.
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