♠ Posted by Emmanuel in
China,
Currencies,
IMF
at 11/30/2015 07:07:00 PM
Here's another step towards the Chinese currency becoming a globally important one. Everyone sort of expected this, but for the Chinese, it's a major achievement nonetheless. While the inclusion of the yuan in the basket of currencies the IMF uses as reference will not result in a massive surge in RMB holdings there, the symbolism matters quite a lot. As in, China becomes the first developing country to have its currency included in the SDR. From the IMF
blurb:
The Executive Board of the International Monetary Fund (IMF) today
completed the regular five-yearly review of the basket of currencies
that make up the Special Drawing Right (SDR). A key focus of the Board
review was whether the Chinese renminbi (RMB) met the existing criteria
to be included in the basket. The Board today decided that the RMB met
all existing criteria and, effective October 1, 2016 the RMB is
determined to 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 these changes.
At the conclusion of the meeting, Ms. Christine Lagarde, Managing Director of the IMF, stated: “The Executive Board's decision to include the RMB in the SDR
basket is an important milestone in the integration of the Chinese
economy into the global financial system. It is also a recognition of
the progress that the Chinese authorities have made in the past years in
reforming China’s monetary and financial systems. The continuation and
deepening of these efforts will bring about a more robust international
monetary and financial system, which in turn will support the growth and
stability of China and the global economy.”
The value of the SDR will be based on a weighted average of the
values of the basket of currencies comprising the U.S. dollar, euro, the
Chinese renminbi, Japanese yen, and British pound. The inclusion of the
RMB will enhance the attractiveness of the SDR by diversifying the
basket and making it more representative of the world’s major
currencies. The SDR interest rate will continue to be determined as a
weighted average of the interest rates on short-term financial
instruments in the markets of the currencies in the SDR basket.
Authorities of all currencies represented in the SDR basket, which now
includes the Chinese authorities, are expected to maintain a policy
framework that facilitates operations for the IMF, its membership and
other SDR users in their currencies. The paper presented to the Board
will be released soon.
What weight will the yuan have in the SDR basket?
Bloomberg suggests a bit
over 10%. It may not sound like a lot, but it will immediately leapfrog the yen and the pound:
The addition will take effect Oct. 1, 2016, the IMF said. The fund said
the yuan would have a 10.92 percent weighting in the basket. Weightings
will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33
percent for the yen and 8.09 percent for the British pound. The dollar
currently accounts for 41.9 percent of the basket, while the euro
accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4
percent.
There is talk that China has been cautious about devaluing its yuan again after the tumult caused by events in August so that its currency could achieve this very event of SDR inclusion. With that out of the way, I hope PRC authorities avoid any
sudden moves.
