Transcript of a conference call on the conclusion of the Special Drawing Right reviewWashington, D.C.
Monday, November 30, 2015
MODERATOR: Good afternoon, everyone. Thank you for joining this conference call on the SDR review. Before we start let me just remind you of two ground rules that we sent with the advisory a moment ago. This conference call is going to be held on a background basis. Meaning that you can attribute the statements to IMF officials, but you may not name them. And secondly, this call going to be embargoed until 2:00 p.m. Washington Time.
Just one final note. We do have some of journalist colleagues in the room, so we are going to alternate between questions in the room and online. With that, we will start with brief introductory remarks.
IMF OFFICIAL: I'm going to be short and walk you through what the review consisted of, and where the Board came out, and especially as you get the paper it will help you to read the paper with this background.
So, as you know the SDR basket valuation is done every five years to ensure that the basket reflects the relative importance of major currencies in the world's trading and financial systems. The review concluded by the Board this morning was part of the periodic five-year review.
As we detailed in July that China as one of the world's leading exporters continues to meet the first of the two criterions, mainly the trade criterion, therefore the key focus of the review this morning was whether the Chinese currency, the renminbi, also met the second criterion, which is determined by the Executive Board, whether the currency is “freely usable”.
Freely usable under the Fund’s Articles of Agreement is defined the currency that’s widely used to make payments for international transactions, meaning, used directly for imports or debt service payments. And it's widely traded in principal exchange markets, meaning used indirectly to trade it or to exchange it into a currency that a country can use directly. The paper that the Board considered this morning, documented the rise in international use and [inaudible] of the RMB since the 2010 review.
A wide range of indicators suggest that the use of renminbi in international transactions has risen substantially from a low base. The paper also found that the RMB has become more actively traded in foreign exchange markets with sufficient debt to support operations of the size that Fund members may undertake without appreciable change in the exchange rate.
On operational issues, the authorities have recently provided full access to official result managers to the onshore bond and foreign exchange markets, with the implementation of these reforms and other reforms that it's very impressive [inaudible]. The determination was that IMF and other SDR users, would be able to conduct operations in RMB without any significant impediments.
The Board also noted the progress in data disclosure requirements, although this is not a formal criteria that China has joined SDDS, and China has also joined the COFER Survey. The Board considered the staff proposals for a new weighting methodology that responds to earlier criticisms that were detailed in the 2010 paper. The staff proposal that reflects the growing role of international financial flows by giving equal weights to exports and to financial indicators. And by broadening financial indicators to include private financial variables was endorsed by the Board.
So, the conclusions that the Board reached this morning were four. One, it determined that the RMB meets the criterion of a freely-usable currency. This determination will take effect on October 1, 2016 when the RMB will be included in the SDR basket.
Two, as of October 1, 2016 the SDR basket would be expanded to five currencies. Three, the weights of the currencies will be U.S. dollars as 41.73; euro at 30.93; RMB at 10.92; the Japanese yen at 8.33; and the British pounds at 8.09. And finally, the basket has been established for five years from October 1, 2016. I'm going to stop here, so we can take your questions.
MODERATOR: Thank you very much. So, we are going to start with a question here in the room, and then we'll move online.
QUESTIONER: In her opening statement, Managing Director Lagarde said that certainly more reforms would be needed. Why is that necessary, if you guys are comfortable with wherever the yuan is right now? And secondly, in the staff recommendation -- are the staff completely comfortable with this recommendation? Or was there some queasiness expressed, even subtly?
IMF OFFICIAL: I think China economy is (inaudible), and that is not just for the -- in SDR inclusion -- it's the importance of Chinese economy growth, it's a spillover from the Chinese economy to the rest of the world, is increasing. So, it's for the benefit of China, as well as benefit of the whole global world, that China continues in the form that they already announce in the process of SDR inclusion, but also for a longer term transition of their -- indication of their rebalancing.
This is good for China, and good for the whole world. So what I'm going to emphasize is that this whole process of transition for Chinese economy more (inaudible) to the global world is very important, and not just for SDR basket issue, but the whole global economy, and we are expecting that they will continue to implement the reform agenda, that’s pressing towards in the process of SDR and the inclusion discussion.
QUESTIONER: And can I just clarify that. That means that if you were to halt, all other economic reforms right now, or even -- let's just say that, that there will be no problem with the yuan in the SDR basket?
IMF OFFICIAL: My colleague will give you more detailed answers, but I think they did enough reforms, and they did enough tests to make SDR operations no problem, and then I think that cleared the Board decision about inclusion. But I think SDR inclusion is one part of the objective reform, but there are broader reasons why they have continued to reform. That’s what I'm saying.
IMF OFFICIAL: I'll take the inclusion question. And I think it's the end of the road, is start of a journey, and that should be seen. There was no staff queasiness -- without hesitations. A significant amount of work went through in this exercise, and updating data, reaching out to BIS and central banks, and the Fund membership to fill in data sources where data was missing, to be able to assess whether operations were deep enough. RMB operations were deep enough to meet the needs of Fund members.
In all these categories whether, when you look at widely used -- we looked at official foreign exchange holdings, the (inaudible) reserve managers take about the currency for interventions. They looked at international bank liabilities, which is an indication of the current user of the currency, between the bank and their clients, on international debt securities, that’s a proxy for the user of the currency in debt markets, cross-border payments, trade finance which is according to freely-usable. And then on widely-traded, we looked at turnover, both global and regional, and the paper makes persuasive case that the currency is freely usable. There was no hesitation on staff, right.
MODERATOR: Thank you. We are going to move online, and then we'll come back to the room.
QUESTIONER: Hi. I was just -- I have two questions, first of all on the analysis, if you will, of the freely-usable benchmark. I know we'll get the paper at some point, but can you provide us with some details at this point, on where the -- where the RMB ranks in terms of the indicators you used to determine whether a currency is freely usable? And secondly, I guess, kind of a follow up to my colleague’s questions on reforms. Is this kind of a no-strings-attached decision, or have the Chinese committed to any further reforms or is there anything in this decision that ensures that China won't backslide on reforms? Thank you.
IMF OFFICIAL: In making a freely-usable judgment the indicators are input into a qualitative judgment, there is no minimum threshold. There is no quantified level that has to be met. Having said that, freely-usable goes to the heart of Fund operations. Meaning that a country, if it makes a purchase from the Fund, if it's under Fund program, it's likely to get a freely-usable currency when it makes a purchase.
And it's in the interest of the Fund, it's in the interest of the membership to ensure that when the country makes that purchase, at a time of crisis, that it is able to use the currency, and it is able to use the currency directly or indirectly to meet such balance of payment needs and that’s a determination that staff made that the Board endorsed, that RMB meets that test.
Second in terms of reforms, I think the best way to put it is that one of the criterions of being in the SDR basket, one of the principles is that no member should be disadvantaged by using the currency or the others, and my colleagues, defined what China has done but, in generally, moving forward as other currencies move forward, both in the use and the manner in which they are traded, each currency in the basket means it needs to keep up, so that the member is not disadvantaged. So there is some peer pressure in this as it moves forward.
MODERATOR: Thank you. We are going to take one more question online, and the come back to the room.
QUESTIONER: Can you give us a bit more flavor of the Board discussion? Was the decision unanimous? Were there any objections or concerns or considerations raised by Executive Board Members? And are the writings, formula review, could you tell us which financial indicators you took into account in the changing of the formula. And could someone -- I'm sorry to ask, perhaps, what is an obvious question; but what's the significance of having a higher SDR interest rate mentioned at the bottom of the FAQ place? Thank you.
IMF OFFICIAL: I could take the first question. I have to say, on the unanimity question it’s not the policy of the Fund to disclose voting records in board meetings, so we really can’t speak directly to that issue.
IMF OFFICIAL: I can take the second question, so on which financial variables are included in the weights. The current weighting formula that has been used until now, and in fact it’s been in place since 1980 included two variables, exports and reserves. So exports was a broad measure of currency’s roles in international trade and composition of reserves was a measure of several different coordinates on the financial side. That has raised a number of issues which have been recognized for many years. If you go back and look at our previous SDR papers you’ll see these things have been discussed at each review and different ideas have been put on the table to address them.
One of the issues is that the composition of reserves only covers the official sector, so it does not reflect private use. And so one of the reforms to the formula that’s been introduced today is to broaden the composition of reserves to include measures of private use of currencies, and that includes foreign exchange turnover and use in international, which I mentioned earlier, shares of currencies, and international banking liabilities, and the issuance of international debt securities.
On the last question, what’s the significance? Well, whenever there’s a change in the baskets normally there is some impact on the SDR interest rate which is basically a composite of the interest rates in the basket currencies. So there will, as there always in whenever there’s a re-yield, be some impact on the SDR interest rate. That affects a broad range of aspects of the Fund’s operations including remuneration paid to creditors, the rate of charge that the Fund charges borrowers, not low income borrowers, but normal higher and middle income borrowers linked to the SDR interest rate. It also affects Fund’s income. So all those issues the board will have a chance to revisit the implications next year in the context of the standard annual review of the Fund’s income and that will be an opportunity to look at all the implications.
QUESTIONER: Do you expect the inclusion to generate volatility of the currency (RMB) after immediately entering the SDR? What are the most modern financial reforms that you have in China?
IMF OFFICIAL: I think that exchange rate movement will probably depend on the macroeconomic fundamentals and the macro policy rather than the inclusion Renminbi in their SDR basket. The inclusion of Renminbi in the SDR basket has many important long term implications for the Renminbi status in the international capital market as a regional currency. But in the short term, I think the exchange rate movement will be primarily determined by the macroeconomic fundamentals and macro policy rather than the Renminbi inclusions in the SDR basket.
QUESTIONER: I think I’m right in this, but in the July paper you had talked about the likely waiting of the RMB being somewhere between 14% and 16%, 10.9% is significantly below that. How should we read that there?
IMF OFFICIAL: So what was in the July paper was the estimated impact if we use the previous formula which, as I mentioned, has been in place since 1980. But that paper also signaled a view of the staff, which the board endorsed to review the weighting formula. As I said, we’ve been looking at the formula in every review, so this isn’t a new issue. Actually in the 2010 review when no change was made staff put on the table two possible changes which were, in broad terms, to give a higher weight to financial variables and less of a weight to exports.
Of the two, the second one was to have a fixed weight rather than right now the weights in the old formula were endogenous. You basically looked at exports and you looked at reserves and you added the two together and that determined the weights. So that endogeneity is one of the issues the board has, over time, said perhaps that’s something that needs to be addressed.
Then the third issue was broadening the financial side, moving from reserves to include other private indicators, the ones I mentioned before. Foreign exchange turnover, international banking liabilities and debt securities. So the weights that I gave you at the beginning is the outcome of the new formula which basically gives a higher weight to financial sector variables rather than through exports. Then within the financial sector it gives a weight now which didn’t exist before to private transactions rather than solely official.
IMF OFFICIAL: Just to be clear on this because this question has come up before. In the July paper the staff said that the preliminary estimates were between 14 and 16, depending on whether the RMB was added to the basket as the fifth currency or replaced one of the four currencies in the basket. That’s what staff said. The July paper, also talked about moving to a new methodology. So if you look at a five currency basket the starting position would be closer to 14 rather than 16, and the methodology that my colleague described was in the July paper.
MODERATOR: Okay. I’m going to take one more question before turning back on line.
MS. SCOTT: So on the weighting again, without going into the formula, the calculations specifically, what’s the significance of the big drop in the Euro and the drop in some of the others currencies. Is that used more in international debt issuance or in transactions or what is that? More than the Euro? How does that compare?
IMF OFFICIAL: When you get the paper you will see that there are two or three things that are happening. One, there’s an update of the underlying data between 2010 and 2015. Without doing anything, just the update for the full currency basket. The new data increases the weight of the U.S. dollar by about 3 percentage points. I think you’ll find it in the paper.
The reason this happens is because in this period under review reserves increase more quickly than exports and the weight of the dollar is the most in reserves. Also during this period, U.S. exports growth was the fastest. So on both these counts the U.S. increased relative to others and between 10 and 15, again, the rate of the pound dropped on the basis of new data due to sluggish export growth.
What does the new formula do? The new formula increases the rate of the financial variable. So those currencies that have a comparative advantage in financial variables would do better, so to say, relative to those who have a comparative advantage in exports. That then accounts for the deviation, the second deviation, between the dollar the Euro. So now two things have happened. There’s an update in data where the weight in the dollar goes up, and then the introduction of the financial variable where the dollar has a comparative advantage and so the rate goes up a bit further.
Third is the addition of the RMB. RMB is, relatively speaking, weightier in exports than in financial variables. So when it is added it competes more with more currencies that are weightier in exports relative to financial variables. Or to put it differently, when the RMB is added everyone declines, but currencies like the Euro that are weightier in exports relative to financial variables decline more. Currencies like the dollar that are weightier in financial variables decline less. So that’s the effect of the weighting formula.
MODERATOR: Thank you. Questions on line please?
QUESTIONER: My question is about emerging and developing nations. The extent to which this move impacts them. I know that the RMB has become much more widely adopted both in developed countries and in emerging economies. So does this sort of signal a changing dynamic in terms of the use of currencies in emerging and developing nations? Are there any practical reasons in which that dynamic changes in terms of the way that funds are distributed?
IMF OFFICIAL: I can only give you a general answer. Probably each person you ask you’ll get a different answer. But over time I think as output is rotated amongst countries the faster growing countries, both in terms of trade and financial variables, are likely to have a larger share of transactions. So both for currencies inside the basket and currencies outside the basket, as these shades of transactions increase and the currency is widely traded and widely used those currencies are both going to gain in rate and after subsequent review, maybe five or ten years from now, likely to be part of the basket. So it will depend critically on how far they grow and to what extent there is financial deepening in their currencies.
IMF OFFICIAL: It’s quite encouraging for them to see that this case is the first time that emerging market currencies are included in the basket. So it tells a lot of symbolic meaning to many emerging economies.
QUESTIONER: I want you to respond to some of the critics who say that the decision was political or that you bent the rules. What’s your response? Thank you.
IMF OFFICIAL: Contrary to what I read this morning, one, it was not political. There is nothing political about it. That goes to the heart of Fund operations. Whether Fund members, when they are purchasing the currency, will be able to use it for the balance of payments needs. The majority of Fund members are not creditors. They would see this through the lens of a currency being operational for their purposes.
Did we bend the rules? The rules are fairly clear that the existing criteria was adopted. There was no change in the criteria. When you get the paper you will see there is extensive staff analysis on the views of the RMB for Fund members relative to the other four currencies in the basket. The analysis says that the member is no worse off in using the RMB for the balance of payments purposes relative to the dollar, the Euro, the British pound, or the Japanese yen.
QUESTIONER: For the SDR denominated assets in global public institutions will the share of RMB automatically be converted? Secondly, in the IMF lending operation, do the same countries have to receive SDR [funds] according to the weight [of the currencies] or can they choose or negotiate with IMF (inaudible)? Thank you.
IMF OFFICIAL: Let me just maybe take a second question first because I’m not sure I totally understood the first. The second question, what the countries receive when they borrow from the Fund? Well, they can receive SDRs, but they typically, in which case their account would be credited with SDRs. But typically they receive currencies, freely usable currencies. So it might be the dollar. It might be the Euro. In the future it might be the Renminbi when the Renminbi becomes a freely usable currency.
They actually receive a currency, a freely useable currency, but their loan from the Fund is denominated in SDRs, so the value that they borrow and ultimately the value that they have to pay back is determined by the value of the SDR. Again, when they repay they can pay in SDRs, if they’re holding SDRs, but they can also, and typically is more common, they repay in a free usable currency again. Actually, in many transactions they’re getting and receiving one currency, possibly multiple, but typically one freely usable currency.
The first question what other institutions do there are institutions that also use the SDR as a unit of account same as the IMF does. So the implication of the times and of the introduction of the RMB and the other currency weights, if they are trying to replicate the SDR basket they would need to -- once RMB is included in the basket they would need to include the RMB in their transaction which they do not right now, that I think would be the broad implication.
QUESTIONER: Just firstly housekeeping for the legal [department representative], when will the minutes of this board meeting be made public?
IMF OFFICIAL: Five.[Post briefing correction: The policy regarding release of board minutes has been updated. The relevant period is now three years.]
QUESTIONER: Five years so we’ll get through in five years. And secondly just in the bigger picture did this not represent a sea change in the way the IMF views liberalized or closed economies given that the (inaudible) is still a tightly managed exchange rate. The chinese economy is still relatively closed and given that the IMF seems to have allowed some leniency both in the interpretation for reusable and also (inaudible) is allowed to truly be transparent about a foreign exchange reserve which I think IMF took three years to be transparent about that, so is there a larger picture to be seen about the IMF’s view and finally what do you see as the outcome for the global financial monetary system 10 years down the road for a conclusion of the (inaudible). What is the outgrowth for the monetary system of this position?
IMF OFFICIAL: I’ll start on leniency -- there was no leniency in this review. And [inaudibl] under the existing criteria for freely usable concerns the actual international use and trading of currencies and this is different from whether currencies are freely floating or fully convertible. There’s a difference between these two. A currency can be widely used and widely traded even if it is subject to some capital account restrictions. In the past currency such as the pound sterling and the Japanese yen were included in the SDR basket when they had capital account restrictions.
On the other hand there are several currencies that are fully convertible that are neither widely used nor widely traded, so there’s a distinction between both of these concepts. Second on where China and the global system would be 10 years from now [my colleague will take that]. Look on the second issue China joined a call to subscribe from (inaudible) two to three period. The manner in which this is being done is to protect against residual data disclosure and by that I mean disclosing individual currency composition of a country’s holdings to the public through this process. What the COFER is discloses currency composition on an aggregate basis, not on an individual basis. China joining COFER is a huge step forward as far as transparency is concerned -- as far as global transparency is concerned and the time period that was given was done to protect against residue disclosure. So I don’t see any leniency in either the application of the criteria or the assessment towards that. Do you want to take 10 years from now and I will say -- IMF 10 years from now.
IMF OFFICIAL: Yeah, and this is a question, I hope that I know the answers. I think your question of what will happen to the Chinese economy 10 years later and especially what had happened to the global financial monetary system, in some sense will be determined endogenously by what kind of policies China will take from now on and we all know that there are gross 30 is now approaching the lead and they have to change (inaudible) has to reform their economy especially in financial market and adopt many new, new policies and depending on how open they are to this reform agenda and how fast and how open they want to make their financial market (inaudible) the future will be determined. So I think it’s very hard to say from now on because it will be largely (inaudible) by Chinese policy and then the same question. After the global financial crisis you don’t experience the last of reform -- it didn’t mean that the status of the euro will become strengthened in the future and it really depends on what European countries are doing and whether you see that the European Union will be much stronger after this global financial crisis after the reform or not. And then so I think we know that after the inclusion of the RMB now I think they open the possibility might be (inaudible) more market fuller system rather than a dollar system with a possibility but whether it’s going to be realized or not really depends on each country and Europe and in China they are all endogenous policies.
MODERATOR: We are going to take a couple questions online and then back in the room. We are going to wrap up in the next 15 minutes.
QUESTIONER: I was just going to ask, obviously there’s been a lot of speculation in the market about what the impact of this will be on the use of the BRMB in the short term. As the folks who made this decision and understand the mechanics of it do you have any thoughts on that? Would you expect a surge in demand by reserve managers for RMB? What do you think might be the short term impact? Thanks.
IMF OFFICIAL: Usually we need to not comment on the short term market, so I should be very careful in answering this question. In the market we see very different use. You just mentioned that there are some people who thing that RMB’s popularity will increase and the demand will increase. At the same time many other market (inaudible) think that the legalization of the Chinese financial market where we include the RMB will make a more capital output for the reason, so then that impact may be in both ways, so at this moment it’s good to guess what will happen, but from our previous experience of the other treaties, so when we change the basket currencies we usually -- we do not see the larger changes, but I think they are there -- it will be anyone’s guess in the short term.
IMF OFFICIAL: To add one point -- what the decision today very much reflects what has happened which is that the use of the RMB has increased substantially, relative to the situation five years ago at the time of the last review and when you see the paper and you look at the indicators you’ll see that across the board there are substantial increases and so the judgement the board is making today is that that level of use has reach a level where it needs the test of widely used and widely traded. So we’re already seeing an increasing trend in terms use of the RMB, what happens as my colleague said going forward will depend on economics and policies, but the trend has been very strong in the last five years.
QUESTIONER: So the global market is waiting for the monetary policy to change in the US by building stronger dollars, (inaudible) in tough times (inaudible) so my question would be in the long run what kind of the SDR is going to play in terms of hedging that kind of volatility?
IMF OFFICIAL: Look, it’s impossible to answer that. I think what you are asking is if they can move diversified and the answer is yes, they will protect against sharp swings in exchange rate. The answer is yes. Will the SDR become -- is it more representative with the addition of the RMB the answer is yes. Will it have a greater rate than global economy as monetary policy normalization takes place, we’ll have to see. But it does have (inaudible) rates that are more diversified and more representative.
QUESTIONER: (Inaudible) if so to what extent?
IMF OFFICIAL: I think you mean probably kept them globally not just for the responsibility and we believe that China has kept the market opening as to continue gradually but I think what you are emphasizing sequence is more important. We believe that they have to have a very clear monetary framework and then have a flexible exchange rate regime and then they have to have a more market open heading from our previous of many other countries which have opened the capital market there is sometimes a risk involved, so we while emphasizing the right sequence in opening the capital market and having a monetary framework in place is much more important.
IMF OFFICIAL: That would be very dependent on economic conditions but in principle we think that they have continued to mark exchange rate marketability and the monetary framework first and then go to the capital market open.
MODERATOR: Any other questions in the room? QUESTIONER: When are we going to get the paper.
MODERATOR: Yes, so I was going to speak to that. We are trying to make everything humanly possible to get it out as soon as possible. That’s as much as I can say. The outlook is either later today or tomorrow. Tomorrow most likely.
QUESTIONER: Why? I mean you’ve got it. You’ve had it for weeks.
IMF OFFICIAL: The way the paper is released is the release of the board summing up and it takes a few hours to get the summing up organized. If it’s organized this afternoon the whole package will be released this afternoon. Latest by tomorrow. The paper has obviously been there for a few weeks, but it’s the summing up that takes -- the board’s view that takes a few hours to get organized.
IMF OFFICIAL: I know but in the past we’ve broken conventions not to give any market participant a head on lead and that’s not the case. We have released way ahead of the paper, we have without expensive Q and A that gets most of the paper out. But look I hear you. We will do what is humanely possible to get it out. Thank you so much.