Author Topic: Yuan joins Special Drawing Rights Basket as IMF Adds Chinese Renminbi  (Read 3624 times)

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The IMF is adding the Chinese renminbi (RMB) to the basket of currencies that make up the Special Drawing Right, or SDR effective October 1, 2016. IMF in 1969 created the SDR as an international reserve asset to supplement its member countries’ official reserves. The IMF’s Executive Board agreed to change the SDR’s basket currency composition in November 2015 and the decision now enters into force after a period of transition.

The RMB joins the SDR basket with the existing four currencies; the U.S. dollar, euro, Japanese yen, and the British pound.  The Renminbi "people's money" is also known as the yuan. It's the first time a new currency has been added since the euro was launched in 1999.
Perhaps ominously October 1 is the same day that the Communist Party celebrates the founding of the People's Republic of China in 1949. One for the conspiracy theorists to dwell on.
 

SDR "weight" as of Oct. 1

US dollar 41.73 percent
Euro 30.93 percent
China 10.92 percent
Yen 8.33 percent
Pound 8.09 percent

The IMF yesterday fixed the relative amounts of the five currencies in the basket for five years, based on their average exchange rates over the past three months. This helps explain some of the gaming in the Yuan over this time.



PBOC:

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"The inclusion into the SDR is a milestone in the internationalization of the renminbi, and is an affirmation of the success of China's economic development and results of the reform and opening up of the financial sector"

US Treasury Sec Jack Lew:

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"The new IMF status recognizes the "enormous" change in China in the last 10 years that had made the yuan more open, but Beijing still had work to do to make its currency and its economy more market-driven.

Being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency."

IMF:

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In an interview, Siddharth Tiwari (Director of the IMF’s Strategy, Policy, and Review Department) and Andrew Tweedie (Director of the IMF’s Finance Department) explain why this change took place and its significance for the IMF, the SDR, China, and the international monetary system as a whole.

IMF News: What does the renminbi’s inclusion in the SDR basket mean for China?

Tiwari : The RMB’s inclusion is an important milestone in the integration of the Chinese economy into the global financial system. The IMF’s determination that the RMB is freely usable reflects China’s expanding role in global trade and the substantial increase in the international use and trading of the renminbi. It also recognizes the progress made in reforms to China’s monetary, foreign exchange, and financial systems and acknowledges the advances made in liberalizing, integrating, and improving the infrastructure of its financial markets. We expect that the inclusion of the RMB in the SDR basket will further support the already increasing use and trading of the RMB internationally.

In addition, while data disclosure is not a formal criterion for a currency’s inclusion in the SDR basket, issuers of reserve currencies generally meet high transparency standards. The Chinese authorities have recently taken welcome steps to increase data disclosure and enhance their commitment to multilateral data initiatives; for instance, reporting the currency composition of reserves to the IMF. Also, the Chinese authorities continue to work with the Bank for International Settlements on their reporting of the Chinese banking sector statistics. These developments will lead to increased acceptance of the RMB among official holders of foreign exchange reserves.

IMF News: Stepping back a bit, what are the criteria for inclusion in the SDR?

Tweedie : There are two main criteria for a currency to be included in the SDR basket.

The first is the export criterion, which requires that the currencies in the basket be issued by the top exporters of the world. It has been part of the SDR methodology since the 1970s and it aims to ensure that the currencies that qualify for the basket are those issued by members or currency unions that play a central role in the global economy.

The second is the requirement for currencies in the SDR basket to be determined by the Fund to be “freely usable”—that is, 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 to capture the importance of financial transactions in the global economy.

IMF News: How is the renminbi’s inclusion expected to impact the international monetary system?

Tiwari : There are several benefits to the international monetary system.

First, the inclusion of the RMB in the SDR basket consolidates the RMB’s internationalization process. The internationalization of a currency imposes strong requirements on its markets and institutions. Experience shows that some of these elements include developing deep and liquid financial markets, achieving a certain degree of openness of the capital account, delivering predictable macroeconomic outcomes, strong and credible institutions, and securing the integrity of the markets—for example, by putting in place a reliable rule of law. Thus, consolidating and further strengthening the RMB internationalization process will help strengthen the Chinese economy, and therefore the global economy.

Second, the inclusion of the RMB in the SDR basket enhances the attractiveness of the RMB as an international reserve asset. This will help with the diversification of global reserve assets.

More IMF: http://www.imf.org/en/news/articles/2016/09/29/am16-na093016imf-adds-chinese-renminbi-to-special-drawing-rights-basket

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Ignacio Martinez Cortes, a professor at the Center for International Relations at Mexico's Autonomous National University (UNAM), told Xinhua about the SDR Change.

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"The first impact of the RMB's entry into the International Monetary Fund's currency basket will be that loans the IMF grants from now on will be related to the Chinese currency," said Martinez.

"That, without a doubt, reflects China's monetary power around the world. If China didn't have a strong economy, if China's currency didn't have strong backing, the RMB wouldn't have the 10.92 percent share it has as of Oct. 1," .
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IMF Lagarde says Yuan inclusion in SDR is a positive step for China
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11 December 2016
(Extract from page 43 of BIS Quarterly Review, December 2016)



Renminbi turnover has approximately doubled every three years over the past decade and a half (Graph B, left-hand panel). Total daily turnover has reached over $200 million or 4% of global FX turnover. This makes the Chinese currency the eighth most traded currency in the world, overtaking the Mexican peso and only slightly behind the Swiss franc and Canadian dollar.



Along with the rise in the overall trading of the renminbi, its use as a financial instrument and to back financial rather than trade transactions has also increased. In the past, most of the limited turnover was in spot transactions. The Triennial reveals that spot now amounts to less than half of total turnover, while the share of FX swap trading has reached 40%. Associated with this, trading among financial institutions is now much more prevalent, while the share of renminbi trading with non-financial customers has declined steeply, from 19% in 2013 to 8% in 2016 (Graph B, centre and right-hand panels). However, the prominent role of the CNY/USD pair has not changed: 95% of renminbi trading is against the US dollar, and there is no serious liquidity in any other CNY pairs.

Renminbi trading volumes are growing rapidly, and the currency is becoming more financialised. The share of derivative compared with spot trading, and of financial compared with non-financial counterparties, are approaching that of well established and liquid currencies. Also, according to McCauley and Shu (2016), in line with RMB internationalisation, trading in offshore deliverable RMB forwards increased significantly, while that in non-deliverable forwards declined since the last survey. However, there are still impediments to the renminbi becoming a truly international currency. In addition to the low liquidity outside the CNY/USD pair, these include capital controls, the wedge between the offshore and onshore exchange rates, and ineligibility for CLS settlement. At the same time, the rapid growth of renminbi trading and the development of the associated financial markets (Ehlers et al (2016)) suggest that these hurdles may be cleared faster than might be expected.

Source: https://www.bis.org/publ/qtrpdf/r_qt1612u.htm
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