IMF Signals RMB Yuan To Join Reserve Currency Basket
International Monetary Fund (IMF) representatives have given China strong signals that the RMB Yuan is likely join the fund’s basket of reserve currencies, known as Special Drawing Rights, (SDRs).
What that means
The IMF created the SDR in Y 1969 to boost global liquidity as the Bretton Woods system of fixed exchange rates unraveled. While the SDR is not technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket: currently the USD, Euro, Japanese Yen and Great British Pound, to meet balance-of-payments needs. So, the ability to convert SDRs into RMB Yuan on demand is Key. Its value is currently based on weighted rates for the 4 main currencies.
The equivalent of about $280-B in SDRs were created and allocated to IMF members as of September 2015, compared with about $11.3-T in global reserve assets. The US reported about $50-B in SDR holdings as of August 2015.
In a Y 2009 speech, People’s Bank of China (PBOC) Governor Zhou Xiaochuan said the global financial crisis underscored the risks of a global monetary system that relies on national reserve currencies. While not mentioning the RMB Yuan by name, Zhou argued that the SDR should take on the role of a “super-sovereign reserve currency,” with its basket expanded to include currencies of all major economies.
After meeting US President Barack Hussein Obama last month at the White House, Chinese President Xi Jinping thanked the US for its conditional support for the RMB Yuan joining the SDR.
Winning the IMF’s endorsement would allow Chinese government reformers to argue that the country’s shift toward a more market-based economy is gaining momentum.
Global use of the RMB Yuan has risen since the IMF rejected SDR inclusion in the last review in Y 2010.
By one measure, the currency became the 4th most-used in global payments with a 2.79% share in August, surpassing the Japanese Yen, according to the Society for Worldwide Interbank Financial Telecommunication, known as SWIFT.
The IMF uses several indicators to determine if a currency is “freely usable,” the benchmark for inclusion in the SDR basket.
IMF staff members said in a report in August that the RMB Yuan trails its global counterparts in major benchmarks, such as its use in official reserves, debt holdings and currency trading. But also stressed that the fund’s 24 executive directors, who will make the final call, will need to use their judgment.
Many major economies, including the US, Germany and UK, say they are prepared to back the RMB Yuan’s inclusion if it meets the IMF criteria. Supporting the currency may boost relations between China and countries such as the UK, which has sought to make London a major RMB Yuan trading hub.
Adding the RMB Yuan to the basket may also help the IMF improve its standing with the Chinese. China and other EMs (emerging markets) were supposed to gain greater representation at the fund under reforms agreed to in Y 2010, but the US Congress has not yet ratified the changes.
The Big Q: What is likely to happen to RMB Yuan assets long term?
The Big A: At least $1-Tof global reserves will migrate to Chinese assets if the currency joins the IMF’s reserve basket.
Foreign companies’ issuance of Yuan-denominated securities in China, known as Panda Bonds, could exceed $50-B in the next 5 years, according to the World Bank’s International Finance Corp.
“Once the Chinese Yuan becomes part of the SDR, central-bank reserve managers and institutional investors will automatically want to accumulate Yuan-denominated assets,” Hua Jingdong, vice president and treasurer at IFC, said in an interview in Lima earlier this month during the IMF and World Bank (WB) annual meetings. “It will be strategically important for China to welcome all kinds of issuers to become regular issuers in China’s onshore market.”
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Paul Ebeling
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