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IMF welcomes new RMB exchange mechanism

The People's Bank of China's (PBOC) changes to the mechanism for setting the daily exchange reference rate for the renminbi (RMB) "appears a welcome step" as it will allow market forces to play a greater role in determining the exchange rate, the IMF said13 Aug 2015

The full impact of the change will depend on how the new mechanism is implemented, the IMF said.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets. We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years," the IMF statement said.

The PBOC, China's central bank, announced this week that the daily central parity quotes on the China Foreign Exchange Trade System will now be based on three measures: the closing rate of the inter-bank foreign exchange rate market of the previous day; supply and demand in the market; and the price movements of major currencies. The move caused the currency to immediately fall in value.

The IMF is currently considering whether to include the RMB in its 'special drawing rights basket', and the announced change has "no direct implications" on the criteria used, it said.

"Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the RMB were included in the currency basket going forward," it said.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on they value of several international currencies – currently the US dollar, euro, yen and pound sterling.

IMF managing director Christine Lagarde said in March that she expects the RMB to be used more widely around the world, based in Chinese authorities' "commitment to accelerate reforms, particularly in the financial and external sectors".

In January, figures compiled by the Society for Worldwide Interbank Financial Telecommunication showed that the RMB had become one of the top five world payment currencies.