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Yuan should be added to SDR basket next yr

HONG KONG - The Chinese yuan should be added to the basket of currencies that underpin the IMF’s special drawing right next year, as a step toward creation of a global reserve currency, Nobel Prize laureate and architect of the euro Robert Mundell said on Tuesday.

He endorsed Chinese central bank governor Zhou Xiaochuan’s call last month for the U.S. dollar to be replaced as the world’s main reserve currency by the IMF’s Special Drawing Right (SDR) [ID:nPEK184558], and said volatile exchange rates had helped cause the global financial crisis last September.

“It’s time for a change. The Chinese yuan CNYCFXS is now the third most important currency in the world ... arguably more important than the (Japanese) yen, depending on how you measure it,” Mundell told a news conference in Hong Kong. “I believe that in 2010, the yuan should be added to the SDR.”

The Columbia University professor won the Nobel Prize for Economics in 1999 and is often credited as the intellectual father of the euro for his research on optimal currency zones.

The IMF’s SDR is reviewed every five years and the next review is due late next year. Mundell suggested reducing the dollar’s SDR weighting to 40 percent, from 45 percent; keeping the euro weighting at 29 percent and the Japanese yen’s JPY 15 percent weighting, but dropping the pound sterling GBP altogether or cutting its weighting to 5 percent, from 11 percent. The yuan would take up the rest, he said, even though it is not fully convertible.

The strength of the yuan excess demand, which is pushing the yuan higher and forcing China to intervene and buy foreign reserves to keep it in check would compensate for the lack of convertibility, he added.

Under Mundell’s view of an international monetary system based on a global reserve currency rather than the U.S. dollar, the yuan’s convertibility is not such an important issue so long as the Chinese currency remains loosely aligned to the U.S. dollar, he said.

Gold could also be included in the SDR basket to help hedge against inflation, he said.

An aide to the Russian government on Tuesday urged the International Monetary Fund to publish a study on prospects for a new international reserve currency.