Sharp increases in volumes of renminbi denominated letters of credit (L/Cs) seem to have been a factor behind the International Monetary Fund's (IMF's) decision to confer Special Drawing Rights (SDR) on the yuan.

But the use of L/Cs in the Chinese currency is also causing concern amongst analysts who believe it is too early for the yuan to join the exclusive group of currencies that make up the SDR.

Elite currencies

The IMF Executive Board recently met to discuss a staff proposal to include China's yuan in the SDR and agreed to do so next year.

Currently, the value of an SDR is based on a basket of four currencies: the euro, Japanese yen, pound sterling, and the dollar.

L/C concerns

SWIFT, the electronic messaging platform, says nearly 10 per cent of L/C transactions worldwide are renminbi denominated.

But a bulk of this L/C business is written between mainland China and either Hong Kong or Taiwan, while there have long been suspicions of significant mis-invoicing in L/C transactions to evade capital controls.

Moreover, mainland China relies proportionately more on L/Cs than other countries do.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.