(MossackFonseca) - On November 30, 2015, the International Monetary Fund (IMF)
admitted China’s renminbi (RMB), also known as the Yuan, into the Special
Drawing Rights (SDR) basket of currencies. Effective October 1, 2016 the RMB
will be a freely usable currency and will be included in the SDR basket as a
fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the
British pound. Launching the new SDR basket on October 1, 2016 will provide
sufficient lead time for the Fund, its members and other SDR users to adjust to
the change, according
to an IMF press release.
The
following weights have been established for each of the five currencies in the
new SDR basket that will take effect on October 1, 2016:
•
U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
•
Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
•
Chinese renminbi 10.92 percent
•
Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
•
Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)
The
SDR was created by the IMF in 1969 as a supplementary international reserve
asset, in the context of the Bretton Woods fixed exchange rate system. The SDR
is neither a currency, nor a claim on the IMF. Rather, it is a potential claim
on the freely usable currencies of IMF members. Holders of SDRs can obtain
these currencies in exchange for their SDRs in two ways: first, through the
arrangement of voluntary exchanges between members; and second, by the IMF
designating members with strong external positions to purchase SDRs from
members with weak external positions. In addition to its role as a
supplementary reserve asset, the SDR serves as the unit of account of the IMF
and some other international organizations.
The
SDR interest rate provides the basis for calculating the interest charged to
borrowing members, and the interest paid to members for the use of their
resources for regular (non-concessional) IMF loans. It is also the interest paid
to members on their SDR holdings and charged on their SDR allocation. The SDR
interest rate is determined weekly and is based on a weighted average of
representative interest rates on short-term debt instruments in the money
markets of the SDR basket currencies.
Why
the IMF Added the Renminbi
China
is the second largest economy after the United States and is first in world
trade. The renminbi is the No. 4 currency for global trade, accounting for
about 2.5 percent of the total, according to SWIFT, the organization for
interbank financial transfers. Beijing controls the flow of money into and out
of its economy but has encouraged the use of the renminbi abroad, especially
for trade, which helps Chinese exporters by eliminating the cost and risk of
volatile exchange rates. Since 2009, China has signed currency swap agreements
with central banks in Britain, Brazil, Canada, Indonesia, South Korea and other
countries. Branches of Chinese state-owned banks in Britain, Australia,
Germany, Switzerland, Russia, France and Singapore have received authorization
to take deposits or settle trade-related transactions in renminbi.
Impact
on Global Finance
The
SDR has no direct link to financial markets or private business. Over time, the
IMF decision might prompt central banks to hold more reserves in renminbi. JP
Morgan economist Haibin Zhu said renminbi holdings might rise to 5 percent of
global reserves, or about $350 billion, over five years. That might encourage
more use of renminbi for trade and investment. "Longer term, this is a
huge step", said Stephen Innes, chief trader for the currency firm OANDA
in Singapore. "Once investors become more comfortable with Chinese
markets, especially if they continue to progress with opening policies and make
the same strides they did over the past year, international markets will really
embrace Chinese capital markets".
Impact
on China
Economists
say the IMF decision could encourage Chinese leaders to further relax controls
on the renminbi. The ruling Communist Party's latest five-year development plan
says the renminbi will be "freely tradable and freely usable" by
2020. The surprise August introduction of a new mechanism for setting the
government-controlled exchange rate led to 3.5 percent devaluation. However, the
country's top economic official, Premier Li Keqiang, said in September that
there were no plans for further declines. Some traders worry Beijing might
devalue once it achieved its goal of being added to the IMF basket. But others
say Chinese leaders want to be seen as reliable. The renminbi's addition is
"an endorsement as an international currency", said Chen Kang, chief
bond analyst for SWS Research Co. in Shanghai. "That will encourage China
to adopt more measures toward accelerating the process of the opening of its
foreign exchange markets and capital markets".
Unintended
Consequences
