IMF announces inclusion of RMB in SDR with a weight of 10.92%, surpassing the British Pound and Japanese Yen
Release Time:
2015-12-01 18:39
Source:
The International Monetary Fund (IMF) announced on November 30 that the Renminbi (RMB) would be included as the fifth currency in the Special Drawing Rights (SDR) basket, alongside the British Pound, Euro, Japanese Yen, and US Dollar. This is a milestone moment for the internationalization of the RMB, signifying that it has become a major global reserve currency.
However, the new currency basket will only take effect on October 1 next year. In August this year, the IMF announced that the current SDR currency basket's validity would be extended by nine months from December 31 to September 30, 2016.
After the preliminary statement, the IMF confirmed the RMB's SDR basket weight at 10.92%, exceeding the Japanese Yen and British Pound but lower than external expectations. In the preliminary assessment report in July this year, IMF staff estimated the RMB's weight would be between 14% and 16%.
The latest SDR weights are shown in the figure below. The weights will affect the borrowing rates of countries when they borrow from the IMF.
IMF Managing Director Lagarde stated that the inclusion of the RMB in the SDR is a "clear reflection of China's reforms," but she did not elaborate on the RMB's share in the SDR basket.
The so-called "Special Drawing Right" (SDR) is a reserve asset and accounting unit created by the IMF, which can serve as an international reserve like gold and freely convertible currencies. The SDR currency basket previously included only the US Dollar, Euro, Japanese Yen, and British Pound, but now a new member—the Renminbi—will be added.
The IMF sets two conditions for a country's currency to be included in the SDR: first, the country's total exports of goods and services must rank among the top of all member countries; second, the currency must be "freely usable."
In 2010, the IMF Executive Board rejected including the RMB in the SDR after evaluation, stating that the RMB did not meet the "freely usable" condition. A report released by the IMF in early August said that in the last evaluation, China met the "export" entry requirement, but the RMB was not included in the SDR because "it was not determined to be freely usable, which is the second requirement for currency selection."
Monday's decision did not surprise the public. This year, calls for including the RMB in the SDR have increased. IMF staff released a report in mid-month stating that the RMB now meets the "freely usable" currency requirement and recommended its inclusion in the SDR.
After evaluation, IMF staff believe the RMB meets the "freely usable" currency requirement. Therefore, the staff recommended that the Executive Board recognize the RMB as freely usable and include it as the fifth currency in the Special Drawing Rights basket, alongside the British Pound, Euro, Japanese Yen, and US Dollar. The staff also believe that all outstanding operational issues noted in the preliminary analysis submitted to the Executive Board in July this year have been resolved by Chinese authorities. IMF Managing Director Lagarde supports the staff's analysis and recommendations.
The inclusion of the RMB in the SDR has also received support from many Western countries. Major countries such as the UK, France, and Germany have successively expressed support for the RMB's inclusion in the SDR. In late September, after President Xi Jinping's visit to the US, both sides issued a joint statement saying that, provided the RMB meets the IMF's existing SDR evaluation standards, the US supports the RMB's inclusion in the SDR. Xi Jinping emphasized this point at the joint press conference with Obama that followed.
The RMB's weight after joining the SDR is also a key focus. Previously, the US Dollar's weight was 41.9%, the Euro 37.4%, the British Pound 11.3%, and the Japanese Yen 9.4%. The weights will affect the borrowing rates of countries when they borrow from the IMF.
For China, including the RMB in the SDR has important symbolic and political significance.
According to Diana Choyleva, Chief Economist and Head of Research at Lombard Street Research, if the RMB is included as an IMF reserve currency, it will mark China's full integration into the global financial market. Similar to China's accession to the WTO in 2001, the RMB's inclusion in the SDR will open China's capital account and allow market forces to determine interest rates and exchange rates, bringing transformation to the global economy.
However, some opinions hold that the RMB's inclusion in the SDR should not be a catalyst for capital account liberalization. Earlier this month, Zheng Liansheng, Associate Researcher at the Financial Research Institute of the Chinese Academy of Social Sciences, pointed out that the capital account liberalization of related economies mainly depends on internal financial development and internal-external coordination, and there is no direct correlation between being in the SDR currency basket and capital account liberalization.
Joining the SDR is only the first step; the road ahead for the RMB to truly become a reserve currency is still long.
The macroeconomic research institution Capital Economics previously stated that including the RMB in the SDR will not directly increase market demand for RMB assets, and the IMF's endorsement of the RMB as a reserve asset is unlikely to change asset managers' investment decisions.
The factor determining whether central banks are willing to consider a currency as a reserve asset is whether they have confidence that they can sell such assets at any needed time in markets with sufficient depth and good liquidity. The RMB's inclusion in the SDR means the IMF recognizes that the RMB and China's financial markets meet this condition, but each central bank also has its own judgment.
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