The International Monetary Fund will decide on Monday (Nov 30) whether the yuan can be added to its Special Drawing Rights (SDR) basket, alongside the US dollar, euro, yen and pound. Here are five things to know about the yuan and the SDR:
What is the Special Drawing Right?
Created in 1969 by IMF to boost global liquidity, the SDR is not technically a currency, but it gives IMF member countries who hold it the right to obtain any of the currencies in the basket - currently the US dollar, euro, yen and pound - to meet balance-of-payments needs.
So the ability to convert SDRs into yuan on demand is crucial. Its value is currently based on weighted rates for the four currencies.
There is currently an equivalent of about US$280 billion (S$395.8 billion) in SDRs created and allocated to IMF members as of September.
Why does China want this status ?
In a 2009 speech, People's Bank of China governor Zhou Xiaochuan said the global financial crisis underscored the risks of a global monetary system that relies on national reserve currencies.
While not mentioning the yuan by name, Mr Zhou argued that the SDR should take on the role of a "super-sovereign reserve currency" with its basket expanded to include currencies of all major economies.
Winning the IMF's endorsement would allow reformers within the Chinese government to argue that the country's shift towards a more market-based economy is bearing fruit.
Why is the IMF likely to approve this?
Global use of the yuan has surged since the IMF rejected its inclusion into the SDR in the last review in 2010. By one measure, the currency has become the fourth most-used in global payments, with a 2.79 per cent share in August, surpassing the yen, according to the Society for Worldwide Interbank Financial Telecommunication, known as Swift.
Many major economies, including the US, Germany and Britian, say they are prepared to back the yuan's inclusion if it meets the IMF criteria. Supporting the yuan may boost relations between China and countries such as Britain, which has sought to make London a major yuan trading hub.
Adding the yuan to the basket may also help the IMF improve its standing with the Chinese.
What's likely to happen to yuan assets in the longer term?
At least US$1 trillion of global reserves will migrate to Chinese assets if the yuan joins the IMF's reserve basket, according to Standard Chartered Plc and AXA Investment Managers.
Foreign companies' issuance of yuan-denominated securities in China, known as panda bonds, could exceed US$50 billion in the next five years, according to the World Bank's International Finance Corp.
Why is it taking so long?
Virtually all yuan reserves are held under swap agreements with the People's Bank of China, rather than as physical currency, which means PBOC maintains control over the currency and its pricing.
Offshore yuan transactions go through state-owned clearing banks. In Asia too, the yuan is not accepted as collateral for financial transactions but for trade in physical goods where China is one of the counterparties.
All this means the yuan it does not adhere to the "freely usable" definition of the IMF.
This firm grip on the yuan undercuts investors' emphasis on size, stability and liquidity when investing in reserve currencies.
The currency will therefore be more attractive to central banks and investors if they don't have to worry about whether they can buy and sell yuan as and when needed.