China’s yuan may join elite money club this year


LOS ANGELES (MarketWatch) — In what would be a huge milestone in China’s emergence as a major world financial power, the International Monetary Fund looks likely to adopt the country’s currency into the basket that makes up its global forex benchmark.

Or so say strategists at Bank of America Merrill Lynch, writing in a note Wednesday that they believe the IMF will vote this October to include the yuan USDCNY, -0.0371%  as one of the units that make up the Fund’s “Special Drawing Rights” (SDR), a sort of meta-currency used in IMF transactions.

This might not seem like a big deal, but Merrill Lynch assures that it is. By joining the elite club — there are only four currencies in the basket right now: the U.S. dollar DXY, -0.01%  , the euro EURUSD, +0.0736% the British pound GBPUSD, +0.0455%  and the Japanese yen USDJPY, -0.07%   — it would “legitimize its use as a reserve currency,” possibly reducing China’s cost of foreign borrowing and offering an “extra degree of freedom in financing future current-account deficits,” the strategists said.

In fact, given that the yuan already enjoys significant use as a reserve currency, its weighting in the SDR system would likely be higher than that of the pound and yen, they said. According to Merrill Lynch estimates, central banks around the world currently hold a total of more than $80 billion in Chinese government bonds, which would make it the seventh largest reserve currency on earth.

China, and in particular long-serving People’s Bank of China Gov. Zhou Xiaochuan, has for awhile now been pushing for inclusion in the SDR, which is reweighted just once every five years. They didn’t make the last cut in 2010, as the IMF deemed China’s current account hadn’t opened enough to meet the “freely usable” criteria required of SDR currencies.