Chinese yuan or renminbi (RMB) has been included into the basket of special drawing right (SDR) of the International Monetary Fund (IMF) since Oct 1, marking a milestone in the internationalization of the RMB. Here are seven things you need to know about the addition of RMB to the SDR.
1. What is the role of the SDR?
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.
As the Bretton Woods system collapsed and the major currencies shifted to floating exchange rate regimes, the reliance on the SDR as a global reserve asset lessened. However, the SDR allocation totaling SDR 182.6 billion in 2009 played a critical role in providing liquidity to the global economic system and supplementing member countries' official reserves amid the global financial crisis.
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.
2. When did the IMF decide on the inclusion of RMB in the SDR basket?
The Executive Board of the IMF decided in a review on Nov 30 2015, that, effective Oct 1 2016, the Chinese RMB would be included in the SDR basket as a fifth currency, along with the US dollar, euro, Japanese yen and pound sterling.
3. What are the criteria for SDR basket inclusion?
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".
4. Why renminbi can be included in the SDR?
The IMF decided that the RMB meets the existing criteria for SDR basket inclusion in the review in November, 2015. As the world's third-largest exporter in the past five years, China met the first inclusion criterion.
The IMF also determined, effective Oct 1, 2016, the RMB to be freely usable, thus meeting the second criterion for basket inclusion.
5. How does the IMF define the concept of "freely usable"?
A "freely usable" currency is defined in the IMF's Articles of Agreement to mean a currency that the IMF determines is widely used to make payments for international transactions, and is widely traded in the principal exchange markets.
The concept of a freely usable currency is different from whether a currency is either freely floating or fully convertible. A currency can be widely used and widely traded even if it is subject to some capital account restrictions. In the past, currencies such as the pound sterling and Japanese yen were determined freely usable when some capital account restrictions were in place. On the other hand, a currency that is fully convertible is not necessarily widely used and widely traded.
6. What is RMB's weight in the SDR?
The RMB have a 10.92 percent weight in the SDR, while the weights of US dollars, Euro, Japanese yen, and pound sterling is 41.73 percent, 30.93 percent, 8.33 percent and 8.09 percent, respectively.
7. How does the IMF determine currency weights?
According to the IMF's new formula for determining currency weights in the SDR basket adopted in 2010, it 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.
