As Christine LaGarde mentioned, it was not a matter of “if” but “WHEN” the Chinese currency, the Yuan, or Renminbi, would be added to the SDR Basket, it has finally happened. Included in this article are infographics, documents, and links to relevant sources. Please share this with everyone.
Last Updated On: September 30, 2016
By: Nick Giammarino
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IMF Launches New SDR Basket Including Chinese Renminbi, Determines New Currency Amounts
September 30, 2016
Today, the International Monetary Fund (IMF) announced the launch of the new Special Drawing Right (SDR) valuation basket including the Chinese renminbi (RMB), and the new currency amounts that will determine the value of the SDR during the new valuation period.
As approved by the Executive Board of the IMF on November 30, 2015, 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, Japanese yen, and the British pound ( see Press Release No. 15/543). The Board also decided at that time that the weights of each currency would be 41.73 percent for the U.S. dollar, 30.93 percent for the Euro, 10.92 percent for the Chinese yuan, 8.33 percent for the Japanese yen, and 8.09 percent for the Pound sterling.
To mark the launch of the new SDR basket, Ms. Christine Lagarde, Managing Director of the IMF, stated: “The expansion of the SDR basket is an important and historic milestone for the SDR, the Fund, China and the international monetary system. It is a significant change for the Fund, because it is the first time since the adoption of the euro that a currency is added to the basket.
“The Renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets. The continuation and deepening of these efforts, with appropriate safeguards, 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.
“This milestone also reflects the ongoing evolution of the global economy. The Fund plays an important role in this evolving process, and the inclusion of the Renminbi in the SDR basket shows once again that the Fund stands ready to adapt to change.”
In addition, the Board also decided today that effective October 1, 2016, the value of the SDR will be the sum of the values of the following amounts of each currency:
These currency amounts are calculated such that the value of the SDR in U.S. dollar terms is the same under the new basket as the value of the SDR prevailing today, and that, at the average exchange rates for the three-month period ending today (July 1 through September 30, 2016), the share of each currency in the value of the SDR corresponds to the weight approved by the IMF Executive Board on November 30, 2015.
The Board’s decision on the amount of each currency in the SDR valuation basket is the final step toward implementing the results of the latest review of the method of valuation of the SDR (see Press Release No. 15/543).
SDR interest rate
The SDR interest rate that will be determined on October 7 and applied for the week of October 10, 2016 will be the first one that reflects the new SDR valuation basket and includes a representative interest rate for the RMB. The change in the SDR interest rate relative to the previous week will reflect the changes in the composition and shares of currencies in the SDR valuation basket, as well as the changes in the interest rates on each component financial instrument.
IMF Adds Chinese Renminbi to Special Drawing Rights Basket
September 30, 2016
- Renminbi joins U.S. dollar, euro, yen, and British pound in SDR basket
- Change represents important milestone for IMF, SDR, and China
- Move recognizes and reinforces China’s continuing reform progress
Effective October 1, the IMF is adding the Chinese renminbi (RMB) to the basket of currencies that make up the Special Drawing Right, or SDR.
The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. The IMF’s Executive Board agreed to change the SDR’s basket currency composition in November 2015, and the decision now enters into force after a period of transition. The RMB joins the SDR basket in addition to the previously included four currencies—the U.S. dollar, the euro, the Japanese yen, and the British pound (see chart).
In an interview, Siddharth Tiwari (Director of the IMF’s Strategy, Policy, and Review Department) and Andrew Tweedie (Director of the IMF’s Finance Department) explain why this change took place and its significance for the IMF, the SDR, China, and the international monetary system as a whole.
IMF News: What does the renminbi’s inclusion in the SDR basket mean for China?
Tiwari : The RMB’s inclusion is an important milestone in the integration of the Chinese economy into the global financial system. The IMF’s determination that the RMB is freely usable reflects China’s expanding role in global trade and the substantial increase in the international use and trading of the renminbi. It also recognizes the progress made in reforms to China’s monetary, foreign exchange, and financial systems and acknowledges the advances made in liberalizing, integrating, and improving the infrastructure of its financial markets. We expect that the inclusion of the RMB in the SDR basket will further support the already increasing use and trading of the RMB internationally.
In addition, while data disclosure is not a formal criterion for a currency’s inclusion in the SDR basket, issuers of reserve currencies generally meet high transparency standards. The Chinese authorities have recently taken welcome steps to increase data disclosure and enhance their commitment to multilateral data initiatives; for instance, reporting the currency composition of reserves to the IMF. Also, the Chinese authorities continue to work with the Bank for International Settlements on their reporting of the Chinese banking sector statistics. These developments will lead to increased acceptance of the RMB among official holders of foreign exchange reserves.
IMF News: Stepping back a bit, what are the criteria for inclusion in the SDR?
Tweedie : There are two main criteria for a currency to be included in the SDR basket.
The first is the export criterion, which requires that the currencies in the basket be issued by the top exporters of the world. It has been part of the SDR methodology since the 1970s and it aims to ensure that the currencies that qualify for the basket are those issued by members or currency unions that play a central role in the global economy.
The second is the requirement for currencies in the SDR basket to be determined by the Fund to be “freely usable”—that is, widely used to make payments for international transactions and widely traded in the principal exchange markets. This criterion became part of the SDR methodology in 2000 to capture the importance of financial transactions in the global economy.
IMF News: How is the renminbi’s inclusion expected to impact the international monetary system?
Tiwari : There are several benefits to the international monetary system.
First, the inclusion of the RMB in the SDR basket consolidates the RMB’s internationalization process. The internationalization of a currency imposes strong requirements on its markets and institutions. Experience shows that some of these elements include developing deep and liquid financial markets, achieving a certain degree of openness of the capital account, delivering predictable macroeconomic outcomes, strong and credible institutions, and securing the integrity of the markets—for example, by putting in place a reliable rule of law. Thus, consolidating and further strengthening the RMB internationalization process will help strengthen the Chinese economy, and therefore the global economy.
Second, the inclusion of the RMB in the SDR basket enhances the attractiveness of the RMB as an international reserve asset. This will help with the diversification of global reserve assets.
What motivated the change in the SDR basket?
The IMF Executive Board’s decision to include the RMB as of October 1 was taken in the context of the Review of the Method of Valuation of the SDR, which takes place every five years. These reviews typically evaluate the selection criteria for the currencies that should be part of the basket, the selection of currencies, the weighting methodology, and the composition of the basket. Broader issues related to the role of the SDR in the international monetary system and SDR allocation are outside the remit of this review. The SDR valuation framework aims at supporting the SDR as an international reserve asset.
The conclusions of 2010 SDR valuation review, subsequent discussions by the Board in 2011—which ratified that the criteria for inclusion of a currency in the SDR basket should remain unchanged—and the increasing importance of the Chinese economy determined that the 2015 review should focus on the building blocks relevant for the determination of whether to include the RMB in the basket.
“Staff’s thorough analysis—a significant cross-departmental effort to examine complex issues given the development of financial markets—allowed the Executive Board to conclude that the RMB can now be considered widely used and widely traded (according to the definition of a freely usable currency set forth in the IMF’s Articles of Agreement),” said Siddharth Tiwari, Director of the IMF’s Strategy, Policy, and Review Department.
IMF News: How will this change affect the SDR itself?
Tweedie : The RMB’s inclusion is not just an important milestone for China, but also for the SDR itself. This is the first time that a new currency has been added to the basket since the euro replaced the French franc and the Deutsche mark in 1999. The RMB’s inclusion further diversifies the SDR basket and makes its composition more representative of the world’s major currencies. As such, the inclusion is expected to enhance the attractiveness of the SDR as an international reserve asset.
IMF News: So far we have discussed the implications of the RMB’s inclusion for China, the SDR, and the international monetary system. But how does this affect the Fund?
Tweedie : The determination that the RMB is freely usable changes China’s rights and obligations vis-à-vis the IMF and has important implications for the Fund’s financial operations.
When selected to participate in Fund transactions, issuers of freely usable currencies are expected to provide their own currency in purchases (i.e., Fund lending), and receive their own currency from borrowers in repurchases (i.e., repayments to the Fund). This means that, going forward when China is selected, a borrowing member would receive RMB and would need to repay in RMB. If these borrowers ask China to exchange the RMB into another freely usable currency, China would be obliged to collaborate and make its best efforts to assist in the exchange of its currency into another freely usable currency, as is the case with other freely usable currency issuers. In contrast, when other members whose currencies are not determined by the Fund to be freely usable provide resources in Fund financial operations, they are obliged to exchange their currencies for a freely usable currency.
In addition, currencies in the SDR basket should have suitable exchange rates for SDR valuation purposes and a suitable reference interest rate. IMF member countries, their agents, and other SDR holders need to have adequate access to instruments denominated in freely usable currencies for reserve management purposes and for hedging risks.
Review of the Special Drawing Right (SDR) Currency Basket
September 30, 2016
The Review of the Method of Valuation of the Special Drawing Right (SDR) basket is conducted every five years by the IMF’s Executive Board, or earlier if warranted by developments. The purpose of the review is to ensure that the SDR basket reflects the relative importance of major currencies in the world’s trading and financial systems, with a view to enhancing the SDR’s attractiveness as an international reserve asset. The latest review was completed on November 30, 2015.
Scope of SDR reviews
The reviews cover the key elements of the SDR method of valuation. These include the criteria and indicators used in selecting SDR basket currencies, the number of currencies in the basket, and the methodology for determining currency weights. The financial instruments comprising the SDR interest rate basket are also typically covered.
The 2015 Review—SDR basket composition and interest rate
In the most recently concluded review (November 2015), the Executive Board decided that the Chinese renminbi (RMB) met the existing criteria for SDR basket inclusion (see below) and therefore, effective October 1, 2016, would join the SDR basket, along with the U.S. dollar, euro, Japanese yen, and pound sterling. With the RMB’s inclusion in the SDR basket, the three-month benchmark yield for China Treasury bonds will serve as the RMB-denominated instrument in the SDR interest rate basket.
The 2015 Review—Currency weights
The IMF also adopted a new formula for determining currency weights in the SDR basket to address long-recognized issues with the formula that had been in place since 1978. The adopted formula assigns equal shares to the currency issuer’s exports and a composite financial indicator. The financial indicator comprises, in equal shares, official reserves denominated in the member’s (or monetary union’s) currency that are held by other monetary authorities that are not issuers of the relevant currency, foreign exchange turnover in the currency, and the sum of outstanding international bank liabilities and international debt securities denominated in the currency.
The weights of the five currencies in the new SDR basket based on the new formula are listed below:
- 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 amounts of each currency in the revised basket, effective on October 1, 2016, were calculated in accordance with the above-listed weights on September 30, 2016. The calculation was made on the basis of the average exchange rates for these currencies over the three months ending on that date, in a manner that ensures that the value of the SDR in terms of the U.S. dollar will be the same on September 30, 2016 under the current and revised valuation baskets. The new currency amounts will remain fixed over the next five-year SDR valuation period (see daily SDR valuation). Since currency amounts are fixed, the relative weight of currencies in the SDR basket can change during a valuation period, with weights rising (falling) for the currencies that appreciate (depreciate) relative to other currencies over time.
Criteria for SDR basket inclusion
The current criteria for inclusion were adopted by the Board in 2000. They establish that the SDR basket comprises the currencies that are issued by members or monetary unions whose exports had the largest value over a five-year period, and have been determined by the IMF to be “freely usable”.
The export criterion, which acts as a “gateway,” aims to ensure that currencies that qualify for the basket are those issued by members or monetary unions that play a central role in the global economy. This criterion has been part of the SDR methodology since the 1970s.
A “freely usable” currency is defined in the IMF’s Articles of Agreement (Article XXX(f)) to mean a currency that the IMF determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets. The concept of a freely usable currency concerns the actual international use and trading of currencies, and is different from whether a currency is either freely floating or fully convertible. The freely usable concept plays a central role in the IMF’s financial operations. IMF lending operations are, in practice, conducted in freely usable currencies or SDRs. The freely usable concept seeks to ensure that a member can use the currency received from the IMF either directly or indirectly (by exchanging it into another currency without disadvantage) to address a balance of payments financing need. The definition of a freely usable currency requires interpretation, and the IMF Executive Board has relied on quantitative indicators to inform this judgment.
The Chinese RMB met all conditions and operational requirements for being determined freely usable and to be added in the SDR basket at the time of the Executive Board’s decision on November 30, 2015. It was decided to make the new basket effective October 1, 2016 to allow the Fund and its member’s prepare for operations using the RMB. To facilitate this, the Chinese authorities took a broad set of measures to facilitate RMB operations, as a result of which, the IMF, its membership, and other SDR users now have access to onshore foreign exchange and fixed-income markets to perform Fund-related and reserve management transactions in RMB without substantial impediments.
Voting majorities needed for determining the SDR method of valuation
The method of valuation is determined by a 70 percent majority of the total voting power, provided that an 85 percent majority is required for (i) a change in the principle of valuation, or (ii) a fundamental change in the application of the principle in effect. To date, all decisions that have changed the SDR valuation method have been adopted with a 70 percent majority of the total voting power.
The next review of the method of valuation of the SDR will take place by September 30, 2021, unless an earlier review is warranted by developments in the interim.
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