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Transcript of a Conference Call on the SDR Basket
September 22, 2016
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Andrew Kanyegirire
Phone: +1 202 623-7100Email: MEDIA@IMF.org
September 22, 2016
PRESS OFFICER: Andrew Kanyegirire
Phone: +1 202 623-7100Email: MEDIA@IMF.org
OPERATOR: Please stand by we are about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the IMF Conference Call on the SDR Basket.
At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. Today's conference is being recorded.
I would now like to turn the conference over to Andrew Kanyegirire. Please go ahead, sir.
MR. KANYEGIRIRE: Good morning, good evening, good afternoon, depending on where you are calling in from. Thanks for joining us on this call. This a conference call on the transition to the new SDR basket, and as you might know, this will come into effect on October 1, 2016. And so we thought that this might be a good opportunity to have a conversation in terms of updating you on the plans towards the transition to the new SDR basket.
I'm Andrew Kanyegirire, I am with the Communications Department here at the IMF. This call will primarily be led by Siddharth Tiwari, Director of Strategy, Policy and Review Department here at the IMF; and also by Andrew Tweedie, Director of the Finance Department here at the IMF.
We shall start with some opening remarks from Siddarth and Andrew. And then go into a Q&A session. The remarks and the responses during the Q&A are on the record, but this call is embargoed until 11:30 a.m. D.C. / EST time. I will now turn over to Siddharth and Andrew for their opening remarks, and we shall then take it from there. Thank you.
MR. TIWARI: Thank you. And good morning and good evening to colleagues in China. As you know, on October 1, the IMF will make effective the new SDR basket, and the new basket includes the Chinese renminbi in addition to the current SDR basket currencies, which are the U.S. dollar, euro, yen and pound sterling.
You may recall that this decision was taken by the Executive Board on November 30th, upon the conclusion of the SDR valuation review, using the existing criteria for determining the inclusion of currencies in the SDR basket.
When the decision is effective October 1, it will be the first time in the history of the IMF that the number of currencies in the basket will be increased. We started with 16 currencies in 1974, we went down to 5 currencies in 1981, and with the advent of the euro, we went down to 4 currencies in 1999; and these are the 4 currencies in the basket.
The Board also decided that effective October 1, the RMB will be a freely usable currency as defined in our articles, which means the RMB will play a more central role in the IMF transactions, and Andrew describe this part of the briefing in detail after I stop.
The preparations for the new basket are on track. They are proceedings then, the Fund and other SDR users are working closely with the Chinese authority to ensure a smooth transition.
In the broader scheme of things, the inclusion of the RMB as a fifth currency further diversifies the SDR basket and makes its composition more representative of the currencies trading in the world.
This has come after a series of measures, broad measures that the Chinese authorities have taken to facilitate RMB operations by the Fund and its membership. This included, as you know, last year the utilization of assets to the onshore fixed income and foreign exchange market, for Fund Members and agents acting on their behalf.
So with this as background, the inclusion of the RMB in the basket as a freely usable currency is an important milestone for the international monetary system. The inclusion of the RMB will include in its attractiveness for the consolidation and internationalization of the currency, together with the responsibilities that come with it.
Looking ahead; since November last year, there are five areas that I want to touch: One is COFER or rather the reporting of composition of reserves. As you know that this was done last year where China has begun to report a representative portfolio on a partial basis and will gradually increase the reported coverage within two or three years to full coverage, that continues on track.
Second, China continues to work with the BIS on the completeness and the quality of their submissions for banking sector's statistics.
Third, as you must have noticed that on August 26th, the IBRD announced the issuance of SDR-denominated bonds - 500 million - as the first tranche of SDR 2 million bonds. At the time of its placement on September 2nd, the bond was oversubscribed by two-and-a-half times.
Fourth, this morning there is an announcement that New York has been added as a clearing center for the RMB.
And fifth, for our own work plans in the IMF that we are looking at studying the role of the SDR in the international monetary system with a focus on three aspects; one, the official SDR; second, the market SDR; and third, SDR in the unit of account.
Work will proceed in the next six months along all three of these lines with the Board paper that will come to the Board early next year.
Thank you. And I'll give it over to Andrew Tweedie.
MR. TWEEDIE: Thank you, Siddharth. And good morning, good evening, to everyone. Let me just expand on a couple of the points that have been made, particularly in terms of preparing for this transition, and the implications thereof in terms of the Fund’s work.
So, I've mentioned two things, what happens on October 1. The renminbi will join the SDR basket, and it will be called a freely reusable currency, which is a term we use at the IMF to designate -- denote those currencies that are being used in the Fund's lending transactions.
So when the Fund lends, it lends either the SDR directly or transactions of certain members, that can be used by borrowing country to resolve their balanced of payments problems. There are currently four freely usable currencies, the dollar, the euro, the yen and pound sterling, the renminbi on October 1 will become the fifth. And what that means concretely is that when members borrow from the Fund they may receive renminbi in their transactions, and when they are making payments to the Fund they may be asked to make those repayments in the renminbi.
So these are really the major changes. There has been some extensive preparation that has gone into this -- to ensure that the transition happens smoothly. Let me just mention a few of the things that have been done. Before the actual decision taken last year, the review of the SDR basket last November, China had already, as Siddharth mentioned, liberalized access to onshore fixed income and foreign exchange markets for Fund members and their agents.
In April of this year the Chinese authorities published detailed procedures for funds and for banks, and similar institutions that wish to enter China's into bank, fund and foreign exchange markets. China has also amended its procedural arrangements it has with the IMF for the exchange of renminbi and connection with its -- the Fund's financial transactions to reflect the new status of the renminbi as a freely usable currency.
Mainly the SDR users, including the IMF itself, have been making preparations for the change, which includes opening onshore renminbi accounts, and establishing banking relationships with procedures that they would need to transact the renminbi, and transact Fund-related transactions and reserve management transactions.
In terms of next steps, let me just walk you through what will happen between now and October 1st. So, on the September 30th the IMF will publish the new currency amounts that will drive for the SDR basket going forward, on October 1st, and this will be the currency amounts including the renminbi.
These currency amounts will reflect the rates that have already been agreed by the IMF Executive Board, and they are calculated based on the average exchange rates that apply over the three months through September 30th. And also they are calculated so that there is continuity in the SDR basket so there will be no change in the value of the SDR, and is holding from this transition from the old to the new basket.
In this context I should mention that in July the IMF simplified the methodology that it uses for calculating these currency amounts, particularly rounding the currency amounts in a way that’s made it more, I think, very transparent and easy to replicate.
And since late July we have been publishing every week trial calculations of the currency amounts on the IMF's website. So you can go and see those, and they replicate the final calculation that we will make on September 30th. We also publish every day the exchange rates that we use in these calculations and we actually also published an Excel file with the methodology that we use so that anyone can replicate the calculation and see how it is done. Once those currency amounts are determined, they remain fixed until the next review of the SDR basket. So the currency amounts do not change.
What will change over time is the actual weights in the basket. As exchange rates move amongst the major currencies the effective weights will fluctuate, but the currency amounts, the amount of renminbi, the amount of U.S. dollars, euro, yen, and sterling are fixed and they are the amounts that we will calculate on September 30th.
Finally let me mention one other thing, which is the SDR interest rate, so that calculation will also be revised to reflect the inclusion of the renminbi. As you know, the SDR interest rate is based on three-month government yields, benchmark yields, in the SDR basket of currencies. And the renminbi will be added to that, so for the renminbi we will be using the three-month benchmark yield for China’s treasury bonds that’s published every day by the CCBC.
We determine the SDR interest rates every week. We calculate it on a Friday and it applies for the week starting the following Monday. And so the first calculation of the SDR interest rates with the renminbi included will be published on Friday, October 7th, and it will apply for the week starting October 10th. Given that interest rates in China are somewhat higher than the other basket currencies, we would expect a modest impact on the SDR interest rate, but based on current market rates we expect that increase to be quite modest.
I think I’ll stop there and would be happy to take any questions.
OPERATOR: Okay, thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing *1 on your phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
MR. KANYEGIRIRE: Please state your name and let’s try to keep the questions precise and clear.
QUESTIONER: Hi. I was wondering if you can talk a little bit about the progress that China has made since the IMF approved the inclusion and the RMB in SDR. I mean, based on certain metrics certainly it’s made progress, but on others it kind of seems like it has been treading water.
Secondly, if you could just offer your general insights on how you see liberalization in China progressing based on what you’ve seen over the last couple of years. Your former colleague Eswar Prasad has a new book on internationalization of the RMB in which he says that despite the progress that China has made, that the RMB is unlikely to be a true safe haven currency unless China starts to relinquish control over the economy.
MR. TIWARI: I think that China specific questions are for next week when our Asia and Pacific Department rolls out its Regional Economic Outlook and you have plenty of time to discuss it. So I want to keep this conversation on the SDR basket.
And safe haven currencies are determined by the market. They’re determined by the volume of transactions, underlying trade transactions, financial transactions, and they develop over time. And as China’s currency gets internationalized, the designation of New York as a trading center today, clearing center, is an indication they’re all going in the direction of firming up the role of the currency internationally.
QUESTIONER: I’m going to restate one of the previous questions so that we might get some more clarity. He had asked about China’s performance in delivering on its promise to reform under the SDR inclusion. I was wondering how have they performed? Have they performed to the letter of the law or to the principle of the law? I don’t mean that you are laying down the law, but rather the rules and guidelines for inclusion.
And secondly, I wonder if there is any concern that the IMF is being hoodwinked into facilitating China’s rise of the global power without the necessary economic responsibilities that the IMF traditionally has recognized that major parties should implement. We’re talking about open capital accounts, carefully managed exchange rate, et cetera, et cetera.
MR. TIWARI: So this process has been going on for 18 months or so from our side. The working relationship [with China] has been outstanding, absolutely outstanding. There has been an open, frank discussion on the way forward and China has been a true partner in this and in implementing what was needed when it was needed.
If you look at the paper that was issued for the November 30th meeting, the staff did an incredible amount of work, technical work, and going back ‑‑ and this answers your first question – in going back and looking at the indicators from several different angles. And I’m referring to freely usable now because the first criteria were on exports. They looked at reserves, they looked at official foreign currency aspects, international banking viabilities, international debt security, issuance of international debt security, cross-border payments, trade finance, and how that affects market. It was a very detailed work that went on for many months on the basis of which the decision was made.
MR. TWEEDIE: Let me just add the requirements for inclusion in the SDR basket are very much the facts, which is, is the currency widely traded or widely used? Siddharth has taken you through all the things we looked at, like all possible indicators for that and is it one of the major exporters in the world, which it is. The other things you mentioned are not requirements for inclusion for designation as a freely usable currency and have not been in the past. So there’s no change here in the way the IMF is assessing.
QUESTIONER: Sure, but if I may, I remember during the first Greek bailout we kept bugging, the press kept bugging the IMF saying, look, everybody is saying that Greece needs debt relief, that this program will not work, and that the IMF is kind of smoothing the rules and regulations ‑‑ or its own parameters to massage something to get this to go through.
Now, this is not Greek debt relief, this is a different situation, but you do have many, many economists outside the Fund who say, look, this is the Fund massaging the situation to get China in. IMF risked having egg all over its face on this SDR deal, that China may be fulfilling to some legal bar the letter of the law, the letter of the rules here, but really it does not meet the real concepts of why a currency should be included in the SDR. I think that’s the heart of what both Andrew and I are asking and what Eswar is talking about here.
MR. TIWARI: So, two things. Like Andrew, I am would encourage you to join Paul Thompson on the European Regional Economic Outlook on Greece-related questions, and just a straight, one sentence response of a categorical rejection of the manner in which you phrased your question and to add that there was no massaging of any indicator. If anything, this was an incredibly transparent process where at every stage there was a briefing of both the board and the shareholders, so a categorical rejection of that.
Again, we shall be doing Asia-related updates in the coming weeks, as well as the euro. We’ll get a chance to raise more details on some of those issues.
QUESTIONER: Thank you for doing this. You spoke about the foundation and impact regarding the SDR inclusion. So I understand we are not expecting the inclusion of the renminbi to lead to greater volatilities. I would like to know if this is right?
And what will be the implications of this for the general financial report of the IMF due to this inclusion? Thank you very much.
MR. TWEEDIE: Do you mind repeating your question? The connection is not very good.
QUESTIONER: Of course I will do so. My question is that you spoke about the smooth transition and the impact from RMB inclusion and after that. I believe inclusion will lead to volatility. Is this right or not? And what will be that basis for the numbers and for the general financial report that the IMF uses internally?
MR. TIWARI: So two parts. I’ll take one part; Andrew will take the more difficult part. So, look, when there is a diversified basket volatility decreases, but as you rightly mentioned that in the last 12 to 18 months there have been a lot of changes in the value of currencies or exchange rates. And so here’s a diversified basket in terms of its valuation being less volatile, but if the underlying currencies are volatile, then the basket will move more. It depends on how the currencies move against each other in the periods ahead.
QUESTIONER: Excuse me. Does this mean that the inclusion is a black box for you?
MR. TIWARI: Sorry, can you repeat that?
MR. KOUKAKIS: I’m talking about your reference. Is this inclusion, the renminbi inclusion, in your basket, is it a black box for you?
MR. TIWARI: No, no, absolutely not. Look, you could have asked me the same question five years back, I would have given you the same answer that where the volatility of a basket depends on the volatility of the underlying currency against each other, so that’s one answer.
And the second part is that when you expand the basket, a more diversified basket, will be less volatile. But there is a separate answer to your question, which is on the SDR interest rate, and Andrew should address that issue.
MR. TWEEDIE: If I understood the question you’re asking what are the implications for the planned financial transactions. Was that the question?
QUESTIONER: On your report, yes.
MR. TWEEDIE: On the report. I mean, on the financial reporting, you know, the SDR accounts, so all our financial reporting is done in SDRs and our financial statements, and that will continue to be the case. We’ll be using the new basket on October 1, which includes the renminbi.
QUESTIONER: Excuse me, from October 1 or the 7th of October?
MR. TWEEDIE: October 1. The new basket becomes effective on October 1.
OPERATOR: Yes, sir. We’ll go next to Reuters.
QUESTIONER: Hi, thanks for doing the call. I’m just wondering if you can talk a little bit about how you expect the yuan exchange rate to behave once this goes into effect, particularly once the amounts are fixed in the basket on September 30th. A lot of Western economies feel that the yuan has been depressed lately and they say that, well, when the pressures go the other way, the true test of the yuan becoming a market-driven exchange rate is that it’s allowed to respond to upward pressure when market conditions allow. So is there any chance that having this exchange rate or the amount sort of fixed in the SDR basket for five years could act as a brake on that, that it would encourage sort of keeping the exchange rate where it is now because that’s the fixture in the SDR basket?
Also you talked a little bit about the responsibilities that China has going forward now that they have this status. Can you elaborate a little bit about what those are going forward, what does China have to do from here? Thanks.
MR. TIWARI: We are trying to break your question into two.
QUESTIONER: Two parts: How do you expect the exchange rate to behave and what is the response really?
MR. TIWARI: So, look, how the rates behave will depend on -- and I’m not evading your question, but the true answer is it will depend on the bank transactions and cross-border flows. And so expecting anything on that is impossible.
On the second one, in general the issuance of reserve currency subscribed to what are internationally set criteria standards in terms of collaborating with the BIS and banking (inaudible). And to go forward, these are not requirements at all, but the expectation having a fair communication strategy, and these are responsibilities that come with being a reserve currency. And I had detailed the progress in these areas in my opening remarks.
QUESTIONER: Okay, just to follow up, though, on the exchange rate itself. So why wouldn’t this encourage China to keep yuan kind of where it is now if the amounts are fixed in the basket?
MR. TWEEDIE: What fixes the currency amounts is a standard procedure, which is the way the basket has always worked. It is a basket of currencies, so we define the currencies based on the decision by the Executive Board on what should be the weights and on the exchange rates that have applied over the last three months. But it is intended ‑‑ I mean, in fact, an attraction of the basket is that as currencies fluctuate across exchange rates, fluctuate over time, the basket tends to be more stable than individual currencies because it is a basket. This is different to -- so, you know, we’ve had poor currencies for a long time with fixed exchange, with fixed currency amounts, and I don’t think that had any implications on incentives for the countries involved on their exchange rates, and I wouldn’t see any difference here going forward.
MR. KANYEGIRIRE: Thanks, Andrew. Thanks, Siddharth. We have about five minutes left. We can probably take maybe one question and then we’ll have some closing remarks from both Andrew and Siddharth.
OPERATOR: And we’ll take our final question. And please check your mute button. We’re unable to hear you. Please go ahead.
MR. KANYEGIRIRE: Perhaps we can call on somebody else. We can come back when s/he’s ready.
QUESTIONER: Thank you. I’d like to follow up on the responsibilities that come with the internationalization of the renminbi. How accountable is China? Is its decision irreversible? And could you comment on Donald Trump’s accusations of currency manipulation?
MR. TIWARI: What is the first part of your question? The second part I will not answer. But can you repeat?
QUESTIONER: Following up on the previous question about the responsibilities, how is China held accountable? Is the decision irreversible?
MR. TIWARI: So the decision was taken on November 30th. It is effective for the next five years. I think, in general, the biggest responsibility, that is not to (inaudible) it from the market or market pressures that make countries do the right thing. And on that basis the more the currency is internationalized, the greater the market pressure is on the currency. And, therefore, clarity of purpose and clarity in communications will be important. So I see it as enhancing responsibility, enhancing decision-making.
MR. KANYEGIRIRE: Okay. Do we have any questions coming in from China or Japan, Asia to be more specific?
QUESTIONER: How does the RMB actually become a part of the new currency basket?
MR. TIWARI: Yes, how does the RMB become part of the new currency basket, basket? Maybe Andrew will explain on September 30th how the currency amounts will be chosen and moving ahead, depending on the exchange rate, how the rates will vary and the role the RMB will play in the basket.
MR. TWEEDIE: So just to go through it again, so on September 30th, the IMF Executive Board will decide on the currency amounts, including the amount for the renminbi that will be in the basket. Those amounts will be determined based on an agreed methodology, which is actually available to you on the web. You can see there there’s an Excel spreadsheet that replicates it. But in simple terms we look at the average exchange rate of the basket currency over the last three months that will end on September 30th, and that’s one determiner.
The other is that the value of the SDR basket is unchanged as a result of the transition, and from that we can determine what currency amounts using those average exchange rates will give you the rates that the IMF Executive Board has decided. And that can only be determined on September 30th because we are using exchange rates that run all the way through September 30th. So that will be decided on September 30th. They will become effective October 1st. And so at that point you will have the precise amount of the renminbi that will be in the SDR basket going forward.
But you can already see on the web we have publishing information, trial calculations every week on a rolling basis, so you can see already I think the most recent calculation was based on exchange rates through September 19th. So if you go to our website you should be able to see that calculation.
MR. KANYEGIRIRE: We shall now move to wrap up. Thanks for your questions. We have all the information on the website. If you go to the SDR page or look for the SDR links on the menu on the website. There’s quite a lot of information there. We are under embargo, I repeat under embargo, until 11:30 a.m. D.C. time, EST. We were on the record. I’ll ask Andrew and Siddharth if they’ve got some very quick closing remarks.
MR. TIWARI: From my side, inclusion of the Chinese renminbi in the SDR basket is an important milestone in the process of China’s global financial integration. It recognizes and reinforces China’s continuing reform efforts. As this integration continues and expands in other emerging markets around the globe, which will bring them more robust international monetary and financial systems, which in turn would support growth and instability of the global economy. The RMB’s inclusion also enhances the attractiveness of the SDR as an international currency and diversifies the basket and makes the composition more representative of the Fund’s major currencies.
So that’s the message from my side and for you to tune back on September 30th when the managing director addresses this issue.
MR. TWEEDIE: Just let me add, so now we are at the decision to include the renminbi in the basket was taken, as you know, last November 30th. We are now in the final implementation stage of this decision. My headline message would be preparations for that transition are proceeding very well and are absolutely on track. And the IMF and other SDR users have been working very closely with the Chinese authorities to ensure a smooth transition.
MR. KANYEGIRIRE: Thank you. In case of there are any final questions, please get in touch with Raphael Anspach or myself and we can then take it from there.
OPERATOR: Thank you, sir. And that does conclude today’s conference. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.
