China forges ahead with bid to make Yuan a reserve currency

China’s will to ensure that its ever-strengthening soveriegn currency, the Yuan, joins the elite league of reserve currencies is continuing, and is being taken very seriously indeeed by international institutions.

According to the Wall Street Journal, The International Monetary Fund (IMF) has stated that it would require further financial-system overhauls from China if the Chinese Communist Party wishes the IMF to go ahead and enter the currency into its list of reserves.

The statements made by the IMF on Thursday this week appear to mirror the U.S. position on China’s bid to have the yuan included in the IMF’s basket of reserve currencies, this being that Washington has hedged its support, trying to leverage Beijing’s endeavor to encourage a stronger revamp of the financial sector. Managing Director Christine Lagarde has said the IMF is likely to award the yuan reserve-currency status at some point, but left the timing open.

Meanwhile, IMF staff have been gathering data, studying China’s markets and talking with investors and government officials as the fund prepares an official recommendation for the executive board to consider.

“An important part of those discussions are financial market reforms in China,” IMF spokesman Gerry Rice said in a regular press briefing. “We would be looking to progress being made in that area as we head down this path towards the end of the year.”

U.S. Treasury Secretary Jacob Lew and other senior administration officials have said over the last several months that Beijing’s reserve-currency effort is fortuitous timing. The U.S. views the bid as incentive for China’s government to move forward with promised policies that will help liberalize its financial markets.

China’s central bank chief, Zhou Xiaochuan, has outlined Beijing’s plans to move forward with financial-market liberalization. But recent turmoil in China’s markets, questions about Beijing’s market interventions and a deceleration in economic growth are fueling doubts about the government’s commitment to deliver on policy overhauls.

Although the technical study prepared by IMF staff will certainly matter—such as whether there is sufficient unhindered trade in the yuan globally, for example—many economists say the decision will ultimately be a political one made by the fund’s largest shareholders. Several U.S. allies have already voiced support for yuan reserve-currency status.

But while the U.S. could be overruled if a majority of the shareholders back Beijing’s bid, the IMF’s latest comments may indicate the fund sees some wisdom in Washington’s strategy.

The IMF’s board will hold an informal discussion on the matter at the end of the month, but an official decision isn’t expected until at least until October or November. Fund officials have signaled, however, that the IMF could postpone its judgment until the new year, giving the world more time to assess China commitment to market overhauls

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