China is approaching the IMF’s currency basket

China is approaching the IMF's currency basket 3

China is approaching the IMF’s currency basket

When the yuan depreciated last week, halting the rise of the S&P 500 stock index and triggering a sell-off in many commodities, many American politicians were quick to criticize China as a `currency manipulator` and

Eswar Prasad – Professor of Trade Policy at Cornell University commented that moving to a more flexible exchange rate mechanism will increase the possibility of the RMB being included in the IMF’s Special Drawing Rights (SDR).

This move is `in line with signals that China is making slow but steady progress in market-oriented reforms, such as opening capital markets, flexible exchange rates and floating interest rates.`

RMB may be included in the IMF’s reserve currency basket in 2016. Photo: Sputnik News

`China has done exactly what the US Treasury Department has requested. If there are US lawmakers who object, that is a problem for the Government of this country, not for China. This will help increase opportunities for China.`

The IMF and the US Treasury Department have long urged China to relax its rigid exchange rate control mechanism, which makes it difficult for the yuan to fluctuate.

China’s new daily reference rate setting system will be based on the previous day’s closing price, foreign exchange supply and demand and fluctuations in major currencies.

China is looking for opportunities to raise the RMB into a reserve currency.

Arthur Kroeber – Director of research firm GaveKal Dragonomics commented that PBOC’s move is very timely.

Standard Chartered has forecast that the RMB has an 80% chance of being included in the SDR mid-next year.

According to Bloomberg data, this week PBOC also injected a net 150 billion yuan (23 billion USD) into the financial market, through open market operations.

This is the strongest cash injection since February – a time when cash demand was high due to the Lunar New Year.

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