The International Monetary Fund (IMF) should include Chinese currency renminbi (RMB) into its special drawing rights (SDR) basket as it will help reform the international financial system to reflect the growing weight of major emerging market economies, experts said.
"The international system of economic governance is at a turning point," and particularly the IMF "is facing challenges on all sides," Harold James, professor of History and International Affairs at Princeton University, and Domenico Lombardi, director of the Global Economy Program at the Centre for International Governance Innovation in Canada, wrote in a recent article published on the Project Syndicate website, one of the world's leading op-ed websites.
The U.S. Congress has blocked the IMF 2010 quota and governance reforms that would expand the role of emerging economies in the institution for years, and the "Europe has drawn the organization into its debt crisis" with Greece having already missed a payment on its IMF loans, the experts said, adding that the IMF also " carries a stigma" in Asia because of its flawed response to the region's financial crisis in the late 1990s.
"How can the IMF reprise its role as a guardian of international financial stability? One solution could be to adjust its international reserve asset, the Special Drawing Rights, by adding the Chinese renminbi to the basket of currencies that determines its value," they said.
The SDR was created in the 1960s as an international reserve asset that IMF members can claim in times of need. Currently, there are only four currencies in the SDR basket, namely the U.S. dollar, the euro, the British pound and the Japanese yen.
In order to serve a stable reference unit at a time of increasing exchange-rate volatility, "the SDR basket would need to be more comprehensive, including the currencies of large emerging economies, beginning with China," the experts said.
The IMF is conducting its five-year review of the SDR basket this year and will decide whether to include the RBM into its basket this fall. At the last SDR review in 2010, the RMB, or the yuan, met the export criterion, but was assessed as not meeting the "freely usable" criterion.
Taking stock of progress in the RMB's international use in recent years, the experts believed that the RMB now meets the requirement of being "freely usable."
"Since the introduction of a series of domestic reforms aimed at increasing the renminbi's use in international payments, the currency has become the fifth most used for that purpose, accounting for over 2 percent of such transactions. That may not seem like a large share, but it is less than one percentage point below that of the Japanese yen," they argued. "The one sticking point that remains is that the renminbi is not freely convertible, with China's government having yet to eliminate capital controls."
But the IMF has revised its stance on capital controls in recent years and major central banks have been moving toward adopting a mild form of capital controls, according to the experts, suggesting that being "convertible" should not become a key obstacle for the RMB's admission to the SDR basket.
China's market-oriented reform of the RMB exchange rate could also spur investors to advocate for a global asset, they said, noting that the U.S. dollar has appreciated against almost every currency this year except the RMB.
The IMF formally changed its view of the RMB exchange rate in May, declaring that it was "no longer undervalued." Many experts believed that the value of RMB has reached equilibrium.
"If the IMF is to remain relevant at a time of rapid economic transformation, it must adapt. By adding the Chinese renminbi and perhaps other emerging-market currencies -- to the SDR basket,it would demonstrate its willingness and ability to do just that,"the experts concluded.
