In a statement issued by the IMF last week, Ms Lagarde said that the IMF’s staff issued a report to the executive board on the quinquennial review of the SDR, recommending that the RMB be “freely useable” and included in the SDR basket as a fifth currency.
“[The RMB] continues to meet the export criterion for inclusion in the SDR basket, also meets the other existing criterion, that the currency be ‘freely usable’, which is defined as being ‘widely used' for international transactions and ‘widely traded’ in the principal foreign exchange markets,” Ms Lagarde said.
“The decision, of course, on whether the RMB should be included in the SDR basket rests with the IMF’s executive board. I will chair a meeting of the board to consider the issue on November 30 [2015],” she said.
Commenting on the development in an economic update – Asian FX: IMF & the RMB – HSBC Global Research said if the executive board decides to include the RMB in the SDR basket, the new basket will take effect on 1 October 2016.
In terms of implications, the RMB should strengthen temporarily in the short term, HSBC said.
Moreover, in the long term its inclusion "serves as a sign of quality assurance for global users that the currency in question is very liquid and is stable as a store of value”, according to the update.
“SDR inclusion would also encourage China to stay on the reform track, which is important for investors' confidence.”
Specifically, the inclusion would encourage China to stick to financial and capital account liberalisation.
“These would over time increase financial sophistication and improve the efficiency of capital allocation, which would facilitate the economy to be more consumption and service driven.
“It should give China confidence in making its exchange change rate even more market driven, which would free up its monetary policy," said HSBC.
