IMF starts discussion on yuan as reserve currency

The basket is reviewed every five years.

Siddharth Tiwari, director of the IMF’s Strategy, Policy, and Review Department, said that as the current SDR basket will expire at the end of this year, the IMF is proposing extending it by nine months until September 30, 2016. This will allow users to adjust to the new basket should the executive directors decide to include the yuan. The proposed extension will be decided by the Executive Board later this month.

"The review is well underway. Further work still needs to be undertaken in a number of areas to help inform the Executive Board’s decision. Staff continues its technical work, including on addressing data gaps and operational issues, while liaising closely with the Chinese authorities and other members ahead of the formal Board meeting expected later in 2015," said Tiwari.

The change requires voting from IMF members. As a general rule, changes to the method of valuation of the SDR basket require a 70 per cent majority, while certain types of changes respecting the “principle” of the SDR’s valuation require an 85 percent majority of the total voting power. Historically, decisions that have changed the valuation method have been taken with a 70 per cent majority.

The criteria, last updated in 2000, establish that the SDR basket comprises four currencies of members or currency unions whose exports of goods and services had the largest value over a five-year period, and have been determined by the Fund to be "freely usable." 

They are US dollar, euro, Japanese yen and British pound sterling.

According to the IMF, the export criterion aims to ensure that currencies that qualify for the basket are those issued by members/currency unions that play a central role in the global economy. The requirement for currencies in the SDR basket to be also freely usable was incorporated in 2000 to reflect the importance of financial transactions in valuing the SDR basket. The Articles of Agreement define a “freely usable” currency as that which is widely used to make payments for international transactions and is widely traded in the principal exchange markets. The concept of a freely usable currency concerns the actual international use and trading of currencies, and it is distinct from whether a currency is either freely floating or fully convertible. In other words, a currency can be widely used and widely traded even if it is subject to some capital account restrictions. On the other hand, a currency that is fully convertible may not be necessarily widely used and widely traded (due to the size and relative importance of that economy in international transactions).