Yuan Finally Lands in IMF
SDR Basket of Four ($, €, £, ¥)
• IMF Certifies Yuan is Widely Used,
Widely Traded
• Revised Basket Comes into Effect
from 10 Oct 2016
• India to Take a Call on Rupee
Convertibility to Yuan
The
Executive Board of the International Monetary Fund (IMF) confirmed on Monday 30
November that it would be inviting China to join the other four currencies
included in its Special Drawing Rights (SDR) basket, in what has been heralded
as a landmark move for Beijing.
“The Executive Board’s decision to include the [renminbi] in the SDR basket is an important milestone in
the integration of the Chinese economy,” said IMF Managing Director Christine Lagarde said.
The Chinese renminbi now joins the
pound sterling, the euro, the Japanese yen, and the US dollar in the basket,
which serves as the Fund’s international reserve asset, as well as its “unit of
account.” Among other things, the basket allows IMF members who hold SDRs to
exchange them for one of these “freely usable” currencies. This can either be
done voluntarily between IMF members or by the Fund directing those purchases.
Another important aspect of the SDR is that the Fund uses it
in its financing arrangements with individual countries, such as when a country
requests assistance from the IMF.
Being a freely usable currency is one of two criteria that
must be met in order to qualify for the SDR basket. Under the
Fund’s Articles of Agreement, a freely usable currency is defined as “a
member’s currency that the Fund determines (i) is, in
fact, widely used to make payments for international transactions, and (ii) is
widely traded in the principal exchange markets.”
The other criterion involves the country’s status as an
exporter, with the requirement that SDR currencies be from countries or
monetary unions whose exports over the past five years have been the greatest
by value.
The
revised basket, while agreed this week, will not take effect until 1 October
2016. The IMF had confirmed that decision this past August, on the grounds that
doing so would ensure the smooth operation of the system, including if another
currency was added.
The value of the SDR is determined based on the currencies
within that same basket, using a weighted average. Starting in October 2016,
the renminbi will be the third largest within the
overall basket, with the weights designated as follows: 41.73 percent for the
US dollar, 30.93 percent for the euro, 10.92 percent for the Chinese renminbi, 8.33 percent for the Japanese yen, and 8.09
percent for the pound sterling.
This weighting is partly as the result of a new
formula that was also approved by the Fund’s Executive Board this week, taking
into account export values, foreign exchange turnover, the level of reserves
held in other IMF members’ currencies, and international bank liabilities and
debt securities. That basket will then be in place until the next SDR review,
which is currently scheduled for 30 September 2021.
Despite
the various hurdles to overcome over the years, the move had become widely
expected over the past few months, particularly after Lagarde gave
her backing in November to the renminbi’s
inclusion, following the release of a paper by IMF staff to the Executive Board
regarding the SDR review.
The International Monetary Fund had already shown signs of
shifting its position on the renminbi earlier this
year, when officials deemed that the currency was “no longer undervalued”
following an annual review.
Support had also come from other key quarters, including from
the US, which confirmed following a meeting of US President Barack Obama and
Chinese President Xi Jinping that Washington
supported the renminbi’s inclusion in the SDR basket
so long as it met the Fund’s criteria.
The
implications that SDR inclusion – which had been strongly pushed for by those
in China advocating for economic reforms – could have for future policy changes
in Beijing is a persistent question, with some analysts drawing parallels to
the result of China’s entry into the WTO in 2001.
While some analysts have characterised the decision as
symbolic, others have noted that it is one more indication of the currency’s
significantly growing use in trade finance, particularly as China has advanced
to become the top exporter in world merchandise trade and among the
largest importers.
Proponents of the move say that the renminbi’s
inclusion could make the Fund’s international reserve asset more attractive,
with the IMF noting that the change will make the SDR “more representative of
the world’s major currencies.”
However, some critics have questioned whether the SDR review,
which occurs once every five years, may have relaxed some of its criteria in
order to bring the Chinese renminbi into the fold, a
suggestion that IMF officials have countered.
According to the IMF, the renminbi
warranted inclusion for various reasons, such as the notable increase of the
currency’s use in international payments as well as in international trading.
Other reasons, the Fund explained, were the indications that SDR users, IMF
members, and the Fund itself will likely have few hurdles in using the currency
in their operations, due to various reforms that have been implemented by
Beijing.
However, other concerns that have been raised in some
quarters are whether more unexpected changes might be made involving the
currency, given the devaluation last August that surprised markets, though was
ultimately acknowledged by the IMF and others as a step toward letting market
forces play a greater role.
The vice governor of the People’s Bank of China, Yi Gang, told
reporters on Tuesday that the inclusion in the SDR basket will actually help
ensure the currency’s stability, and that additional devaluation is not likely.
The central bank chief also indicated that more reforms are on the horizon.