China's financial reform plans sufficient to support yuan's inclusion into SDR

"Since the introduction of a series of domestic reforms aimed at increasing the renminbi's use in international payments, the currency has become the fifth most used for that purpose, accounting for over 2 percent of such transactions," Harold James, professor of History and International Affairs at Princeton University, wrote in an article published on the Project Syndicate website, one of the world's leading op-ed websites.

"That may not seem like a large share, but it is less than one percentage point below that of the Japanese yen," James said, adding that the IMF should include the yuan and perhaps other emerging-market currencies in its SDR basket, which currently contains only four currencies, namely the US dollar, the euro, the British pound and the Japanese yen.

The IMF staff report didn't give any indications as to whether the yuan would be put in the SDR basket later this year, but recommended extending the current SDR basket mandate by nine months until September 2016.

The proposed extension, which will be decided by the IMF's Executive Board later this month, will not "in any way prejudge the timing of conclusion or outcome of the review," a senior IMF official said in a conference call with reporters on Tuesday, nothing that these two things were not related.

"This was mainly in response to feedback from SDR users" because it's not easy for them to rebalance their reserve holdings on Jan. 1, 2016, he said, adding that SDR users also need more time to rebalance their positions if a new currency is added to the basket.

The IMF's Executive Board still plans to formally discuss the yuan's SDR review toward the end of the year, the official said.

"We still think it is highly likely that yuan will be included -- though for technical reasons, the actual date of inclusion may be extended to Sept 30, 2016, to give reserve managers time to adjust," Wang Tao, chief China economist at UBS, said in a research note.

While the UK, German and several other European countries have expressed support for adding the yuan into SDR basket this year, the United States, which holds the largest voting share of the IMF, remains cautious.

"The US would like to see more financial reforms in China. Some of these are very basic, like reporting reserves according to IMF standards...I think the US and China should be able to agree on that," Dollar said, adding that China's plans for financial reforms "may very well be satisfactory" to the IMF, the US and other shareholders.

"I'm pretty sure the US doesn't want to be isolated on this. I think the US would work closely with European allies," Dollar said. "I'm cautiously optimistic we would get good outcome on this. "