Shareholders in the Washington-based International Monetary Fund are widely expected to vote to admit the yuan, also known as the renminbi, as the fifth member of its special drawing rights (SDR) currency basket alongside the US dollar, the Japanese yen, sterling and the euro.
What does this mean for China’s authorities?
Beijing has long hoped the yuan would be added to the small list of currencies in which member-countries’ claims on the IMF are denominated. Experts say a vote to include the yuan in the SDR would be a big political victory for China.
China hopes this stamp of approval will increase the yuan’s desirability as a reserve currency for investors and undermine the hegemony of the dollar as a global reserve currency.
Currency strategists at RBC Capital Markets think that the inclusion of the yuan would mean more politically than financially. “More than anything, it is a symbolic and political milestone in China’s long path to renminbi internationalisation,” they wrote in a research note.
Getting the yuan in the SDR basket will be a big achievement for the Chinese government, agrees Professor Kamel Mellahi at Warwick Business School. He sees the likely move as a vote of confidence in the economic and financial reforms underway in China. But authorities, including the People’s Bank of China (PBOC) central bank, still have more work to do.
“The inclusion of the yuan in the basket of international currencies is a huge symbolic victory for China, but comes with strings attached to it,” says Mellahi, who researches business in China and other emerging economies.
“China has been loosening its tight grip on the management of the yuan for a while, but now the PBOC is going to come under immense pressure to be more transparent and improve its way of communicating with international markets. This requires massive cultural and procedural changes.”
“Also, China will have to loosen its grip on the management of its currency and introduce a bunch of financial reforms.”
What is the special drawing rights system?
The special drawing rights (SDR) system was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.
As the IMF explains:
“A country participating in this system [Bretton Woods] needed official reserves— government or central bank holdings of gold and widely accepted foreign currencies — that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate.
“But the international supply of two key reserve assets—gold and the US dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.”
Not long after the creation of the SDR, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. But the SDR system has become more important again recently by supplementing member countries’ official reserves during the credit crunch and global financial crisis.
So is the SDR a currency?
No. The SDR is not a currency but rather an international reserve asset which the IMF uses to supplement its member countries’ reserves. The SDR’s value is based on the basket of the four international currencies and SDRs can be exchanged for “freely usable” currencies, the Fund says. SDRs are allocated to IMF members from time to time.
Nor is the SDR a claim on the IMF, rather it is a “potential claim on the freely usable currencies of IMF members”, the Fund says. Holders of SDRs can obtain those currencies in exchange for their SDRs. They can either arrange exchanges between members or the IMF can designate members with strong external positions - those with big current account surpluses - to purchase SDRs from members with weak external positions.
How do currencies get added to the SDR basket?
The SDR basket is typically reviewed every five years by the IMF’s executive board to ensure that it “reflects the relative importance of currencies in the global trading and financial systems”.
The weighting of different currencies can shift at these reviews and it is also an opportunity to add new currencies. The last time that happened was in 1999 when the newly created euro single currency was added.
The IMF managing director Christine Lagarde released a statement earlier this month saying its staff were now recommending including the yuan in the SDR basket. Lagarde said she supported the staff’s findings but that the decision would rest with the IMF’s executive board, whose members represent all 188 countries in the IMF. The board meets on Monday 30 November. If the members vote to add the yuan, the new basket will take effect in October 2016.
What criteria do currencies have to meet to join the basket?
The basket is based on currencies from the four countries or currency unions - such as the eurozone - whose exports of goods and services had the largest value over a five-year period. If China’s yuan is added, that list of currency issuers expands from four to five.
To join the basket, a currency must also be judged by the IMF’s executive board to be “a freely usable currency”. In other words, it must be a currency that is widely used to make payments for international transactions and widely traded in the main exchange markets.
There is also an “export criterion”, designed to ensure that currencies in the basket are those issued by IMF members or currency unions that “play a central role in the global economy”, in the Fund’s words.
Does China’s yuan meet the criteria?
The IMF’s experts think so and Fund emphasises that “freely usable” relates to the actual international use and trading of currencies, and is different from whether a currency is freely floating.
Chinese authorities have announced a raft of changes to liberalise the country’s financial markets, moves seen as also helping the yuan meet the freely usable rule. In particular, Beijing’s surprise devaluation of the yuan earlier this year was seen as a move towards allowing the market, instead of the government, to fix the the currency’s value, thereby easing the way to SDR inclusion.
But not everyone is convinced the criteria have really been met, says Jasper Lawler, market analyst at the spread betting company CMC Markets UK.
“Given the heavy-handed government intervention in Chinese markets of late, from the currency devaluation to disallowing institutions from selling shares, there are fears the IMF may be bending the rules to accommodate the world’s second largest economy into its Special Drawing Rights,” said Lawler.
(Guardian)
What does this mean for China’s authorities?
Beijing has long hoped the yuan would be added to the small list of currencies in which member-countries’ claims on the IMF are denominated. Experts say a vote to include the yuan in the SDR would be a big political victory for China.
China hopes this stamp of approval will increase the yuan’s desirability as a reserve currency for investors and undermine the hegemony of the dollar as a global reserve currency.
Currency strategists at RBC Capital Markets think that the inclusion of the yuan would mean more politically than financially. “More than anything, it is a symbolic and political milestone in China’s long path to renminbi internationalisation,” they wrote in a research note.
Getting the yuan in the SDR basket will be a big achievement for the Chinese government, agrees Professor Kamel Mellahi at Warwick Business School. He sees the likely move as a vote of confidence in the economic and financial reforms underway in China. But authorities, including the People’s Bank of China (PBOC) central bank, still have more work to do.
“The inclusion of the yuan in the basket of international currencies is a huge symbolic victory for China, but comes with strings attached to it,” says Mellahi, who researches business in China and other emerging economies.
“China has been loosening its tight grip on the management of the yuan for a while, but now the PBOC is going to come under immense pressure to be more transparent and improve its way of communicating with international markets. This requires massive cultural and procedural changes.”
“Also, China will have to loosen its grip on the management of its currency and introduce a bunch of financial reforms.”
What is the special drawing rights system?
The special drawing rights (SDR) system was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.
As the IMF explains:
“A country participating in this system [Bretton Woods] needed official reserves— government or central bank holdings of gold and widely accepted foreign currencies — that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate.
“But the international supply of two key reserve assets—gold and the US dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.”
Not long after the creation of the SDR, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. But the SDR system has become more important again recently by supplementing member countries’ official reserves during the credit crunch and global financial crisis.
So is the SDR a currency?
No. The SDR is not a currency but rather an international reserve asset which the IMF uses to supplement its member countries’ reserves. The SDR’s value is based on the basket of the four international currencies and SDRs can be exchanged for “freely usable” currencies, the Fund says. SDRs are allocated to IMF members from time to time.
Nor is the SDR a claim on the IMF, rather it is a “potential claim on the freely usable currencies of IMF members”, the Fund says. Holders of SDRs can obtain those currencies in exchange for their SDRs. They can either arrange exchanges between members or the IMF can designate members with strong external positions - those with big current account surpluses - to purchase SDRs from members with weak external positions.
How do currencies get added to the SDR basket?
The SDR basket is typically reviewed every five years by the IMF’s executive board to ensure that it “reflects the relative importance of currencies in the global trading and financial systems”.
The weighting of different currencies can shift at these reviews and it is also an opportunity to add new currencies. The last time that happened was in 1999 when the newly created euro single currency was added.
The IMF managing director Christine Lagarde released a statement earlier this month saying its staff were now recommending including the yuan in the SDR basket. Lagarde said she supported the staff’s findings but that the decision would rest with the IMF’s executive board, whose members represent all 188 countries in the IMF. The board meets on Monday 30 November. If the members vote to add the yuan, the new basket will take effect in October 2016.
What criteria do currencies have to meet to join the basket?
The basket is based on currencies from the four countries or currency unions - such as the eurozone - whose exports of goods and services had the largest value over a five-year period. If China’s yuan is added, that list of currency issuers expands from four to five.
To join the basket, a currency must also be judged by the IMF’s executive board to be “a freely usable currency”. In other words, it must be a currency that is widely used to make payments for international transactions and widely traded in the main exchange markets.
There is also an “export criterion”, designed to ensure that currencies in the basket are those issued by IMF members or currency unions that “play a central role in the global economy”, in the Fund’s words.
Does China’s yuan meet the criteria?
The IMF’s experts think so and Fund emphasises that “freely usable” relates to the actual international use and trading of currencies, and is different from whether a currency is freely floating.
Chinese authorities have announced a raft of changes to liberalise the country’s financial markets, moves seen as also helping the yuan meet the freely usable rule. In particular, Beijing’s surprise devaluation of the yuan earlier this year was seen as a move towards allowing the market, instead of the government, to fix the the currency’s value, thereby easing the way to SDR inclusion.
But not everyone is convinced the criteria have really been met, says Jasper Lawler, market analyst at the spread betting company CMC Markets UK.
“Given the heavy-handed government intervention in Chinese markets of late, from the currency devaluation to disallowing institutions from selling shares, there are fears the IMF may be bending the rules to accommodate the world’s second largest economy into its Special Drawing Rights,” said Lawler.
(Guardian)
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