China dealt a blow as IMF delays its decision on the renminbi

If China was hoping that its decision to allow market forces to play a great role in determining the level of the renminbi would expedite the currency’s inclusion in the IMF’s special drawing rights (SDR) basket, it will be very disappointed this morning.

It won’t. At least, not in the near term.

In a statement released overnight the IMF announced that its SDR basket – consisting of the US dollar, euro, Japanese yen and Great British pound – would remain unchanged until September 16.

A review of the basket, and the possible inclusion of the renminbi within it, was originally slated for November this year.

Had the decision to add the renminbi been granted, it would have joined the SDR at the start of 2016.

Here’s the IMF on the basis for pushing back the SDR review:

“The nine-month extension is intended to facilitate the continued smooth functioning of SDR-related operations and responds to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year. The extension would also allow users sufficient lead time to adjust in the event that a decision were to be taken to add a new currency to the SDR basket. As noted in recent IMF staff papers, the approved extension of the current basket does not in any way prejudge the outcome of the Review of the Method of Valuation of the SDR, expected to be discussed formally by the Executive Board later this year”.

In essence, complaints about the timing of a potential change in the SDR basket – something that would have occurred over the New Year – was one factor, along with allowing market participants time to adjust to the possible inclusion of the renminbi should its admission be granted.

As the IMF statement outlines, the delay in the decision does not in anyway prejudge the decision on the renminbi’s inclusion. Whether that will be enough to satisfy Chinese authorities is debatable though.

The sudden decision by the PBOC last Tuesday to allow market forces a greater role in determining the trading level of the renminbi was seen as an attempt by Chinese policymakers to facilitate an early inclusion of the currency in the SDR.

The timing of the decision, just days after the IMF first mooted that they were considering delaying the SDR review until next year, suggests this may have been the case.

Criticisms from the IMF on the lack of market influence on determining the level of the renminbi, and the change in tact from the PBOC to allow this to occur, adds credence to this view.

The question now is what will the response be from the PBOC to the IMF’s announcement? It has held the USD/CNY largely steady since Thursday last week, in line with market forces.

Will that remain the case today in light of the overnight announcement? We’ll soon find out – the PBOC’s Thursday fixing occurs at 11.15am AEST.

On Wednesday, the spot USD/CNY rate closed at 6.396.

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