— This is the script of CNBC's news report for China's CCTV on June 25, Thursday.
Beijing's efforts to turn the yuan into a global trading currency by liberalizing capital account controls are paying off, and one event coming up later this year could nudge Beijing into widening the yuan trading band -- the International Monetary Fund's decision on whether the yuan will be included in the Special Drawing Right (SDR) basket of global trading currencies.
So, what is SDR, and why is it important?
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.
Only a few years after the creation of SDRs, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.
Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.
Now, if the RMB gets included, the Chinese currency will join the U.S. dollar, the euro, the yen and the pound sterling. This, analysts say, would further internationalize the yuan.
And some might ask, why is it important for China to have the RMB included in the SDR basket?
As IMF head Christine Lagarde says is only a matter of time, should over time expand its role as a currency for international trade and investment and make the world's central banks more likely to hold it in reserve.
That in turn should lower transaction costs, exchange risk and borrowing costs for China, already the world's largest trading nation, and its companies.
Fresh from its success in drawing member countries to a new China-led development bank in the teeth of U.S. opposition, Beijing would also enjoy another victory over Washington, which opposes early inclusion of the yuan in the SDR and sees China as a nascent rival for influence over global financial architecture.
However, as one analyst told CNBC, Chinese authorities may want the yuan to become a global currency, but they will have a long way to go.
[PATRICK CHOVANEC, Silvercrest Asset Management, Chief Strategist] "People focus on the desirability of RMB. The RMB is very desirable as a trade currency, for people to purchase exports from China. It's not so desirable as investment currency because China's capital markets are both small and restricted, but that could change over time. But the real key issue is accessibility. How do people accumulate RMB abroad, and that means China's relationship with the global economy will have to fundamentally change."
CNBC's Qian Chen, reporting from Singapore.
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