IMF Adds Chinese Renminbi to Special Drawing Rights Basket
IMF News, September 30, 2016
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Bibliographic details
- Published: September 30, 2016
Key facts and timeline
- Publication date: September 30, 2016
- Effective date of RMB inclusion in the SDR basket: October 1
- The SDR was created in 1969 to supplement member countries’ official reserves.
- The IMF’s Executive Board agreed to change the SDR’s basket currency composition in November 2015.
- SDR valuation reviews take place every five years.
- The last time a new currency was added prior to the RMB was when the euro replaced the French franc and the Deutsche mark in 1999.
Composition of the SDR basket
- Currencies in the SDR basket after the change: U.S. dollar, euro, Japanese yen, British pound, and Chinese renminbi (RMB).
- The RMB joins the previously included four currencies—the U.S. dollar, the euro, the Japanese yen, and the British pound.
Criteria for inclusion in the SDR basket
- Two main criteria for inclusion:
- Export criterion: currencies must be issued by the top exporters of the world; this criterion has been part of the SDR methodology since the 1970s.
- “Freely usable” criterion: currencies must be widely used to make payments for international transactions and widely traded in the principal exchange markets; this criterion became part of the SDR methodology in 2000.
Rationale and IMF analysis
- The IMF determined the RMB is “freely usable” based on staff analysis: “Staff’s thorough analysis—a significant cross-departmental effort to examine complex issues given the development of financial markets—allowed the Executive Board to conclude that the RMB can now be considered widely used and widely traded (according to the definition of a freely usable currency set forth in the IMF’s Articles of Agreement),” said Siddharth Tiwari, Director of the IMF’s Strategy, Policy, and Review Department.
- Drivers cited for inclusion:
- China’s expanding role in global trade and the substantial increase in the international use and trading of the renminbi.
- Progress made in reforms to China’s monetary, foreign exchange, and financial systems.
- Advances in liberalizing, integrating, and improving the infrastructure of China’s financial markets.
- Recent steps by Chinese authorities to increase data disclosure and engage with multilateral data initiatives, for example reporting the currency composition of reserves to the IMF and working with the Bank for International Settlements on Chinese banking sector statistics.
Expected impacts and benefits
- For China and RMB internationalization:
- Inclusion is described as “an important milestone in the integration of the Chinese economy into the global financial system.”
- Expected to further support the already increasing use and trading of the RMB internationally.
- Consolidates the RMB’s internationalization process, which encourages development of deep and liquid financial markets, openness of the capital account, predictable macroeconomic outcomes, strong and credible institutions, and market integrity (for example, reliable rule of law).
- For the international monetary system and reserve diversification:
- Inclusion “enhances the attractiveness of the RMB as an international reserve asset.”
- Expected to help with the diversification of global reserve assets.
- The RMB’s inclusion “further diversifies the SDR basket and makes its composition more representative of the world’s major currencies,” which is expected to enhance the attractiveness of the SDR as an international reserve asset.
- For the IMF and Fund financial operations:
- Determination that the RMB is freely usable changes China’s rights and obligations vis-à-vis the IMF and has important implications for the Fund’s financial operations.
- When China is selected to participate in Fund transactions:
- Issuers of freely usable currencies are expected to provide their own currency in purchases (Fund lending) and receive their own currency from borrowers in repurchases (repayments to the Fund).
- A borrowing member would receive RMB and would need to repay in RMB.
- If borrowers ask China to exchange RMB into another freely usable currency, China would be obliged to collaborate and make its best efforts to assist in the exchange of its currency into another freely usable currency.
- Contrast: members whose currencies are not determined by the Fund to be freely usable and who provide resources in Fund financial operations are obliged to exchange their currencies for a freely usable currency.
Institutional and valuation considerations
- Currencies in the SDR basket should have:
- Suitable exchange rates for SDR valuation purposes.
- A suitable reference interest rate.
- IMF member countries, their agents, and other SDR holders need to have adequate access to instruments denominated in freely usable currencies for reserve management purposes and for hedging risks.
International Monetary Fund