News Analysis: SDR yuan incorporation to solidify global economy

Chinese economists are excited about the likelihood of the Chinese yuan being incorporated in the IMF Special Drawing Rights (SDR) basket this year, believing the move will boost global financial stability and make the SDR currency mix more balanced.

The IMF is going to discuss the inclusion of the yuan into the SDR basket first at an informal board meeting in May, and conduct a formal review in October.

Christine Lagarde, IMF managing director, on Thursday called for emerging markets and developing countries to be given greater weight and voice in global economic institutions to leverage national initiative for the benefit of the global community.

Created by the IMF in 1969, the SDR is a foreign exchange reserve asset comprised of a weighted basket of four currencies -- the U.S. dollar (41.9 percent), the euro (37.4 percent), the British pound (11.3 percent) and the Japanese yen (9.4 percent).

As all four currencies are from developed economies, incorporating the yuan will make IMF members, especially developing nations, better represented and make the international mechanism more stable and equitable.

Allocated to IMF members on the basis of their contribution to the fund, an SDR represents a claim to foreign currencies for which it may be exchanged in times of need.

The yuan's value has remained steady in the past few years and was one of the strongest currencies in 2014 amid the weakness of the euro and the yen.

Yi Gang, vice governor of the People's Bank of China (PBOC), said the yuan was the second-strongest currency last year, trailing only the U.S. dollar.

Last year, the euro and the yen both depreciated more than 10 percent against the U.S. dollar, while the yuan only depreciated by about 2 percent, Yi said.

Bai Ming, a trade expert with the Ministry of Commerce, said keeping the yuan out of the SDR basket may hurt the IMF's influence and authoritativeness in the global financial system, given the current status of the Chinese currency.

The yuan became the world's No. 2 currency for trade finance globally in 2013, and overtook the Canadian and Australian dollars to enter the top five world payment currencies last year, according to global transaction services organization SWIFT.

Offshore use of the yuan is becoming more and more frequent as China's central bank pushes for opening up in the financial sector and the yuan's internationalization.

The value of a country's total exports and imports, as well as whether a currency is fully convertible under the capital account, are taken as the two key criteria for SDR entry.

The IMF reviews the currencies in the SDR basket every five years. At the last SDR review in 2010, the yuan met the first criterion, but was assessed as not meeting the "freely usable" criterion.

PBOC governor Zhou Xiaochuan said last month that China would accelerate reform and opening up of its capital market in 2015, with the aim of making the yuan convertible on the capital account.

Zhang Yuewen, a researcher with the Chinese Academy of Social Sciences, said adding the currency of the world's second-largest economy and greatest developing country into the basket is an innate requirement for IMF reforms to reflect the rising significance of developing nations and emerging markets.

"The yuan's SDR entry is going to be a natural process," Zhang said. Endi