RMB Internationalization Report 2015: RMB is Very Likely to Join the SDR Basket in 2016

2015-12-01 IMI

This is an excerpt from the RMB Internationalization Report 2015 Special Drawing Rights (SDR) was a super-sovereign currency created by IMF in 1969 to solve increasingly severe “Triffin Dilemma” caused by the US dollars. As a new international reserve currency, SDR is used only among governments of IMF’s member countries and between IMF and its member countries. SDR consists of a basket of currencies and the weight of each currency is determined by its share in international exports and financial markets. SDR included 16 currencies when it was created and almost included currencies of all developed countries. Because of the establishment of the European Monetary System, EC members used a fixed exchange rate where a currency’s value of each member was fixed against the European Currency Unit (ECU), the predecessor of the common currency euro. To adapt to the reform of the international monetary system, IMF simplified the SDR basket to five currencies in 1980: the U.S. dollar, the Deutsche mark, the pound sterling, the French franc and the Japanese yen. Later, the SDR evaluation was reviewed every five years to make necessary adjustment to basket currencies of SDR and their weights. After the introduction of Euro in 1999, IMF replaced the German mark and the French franc in the basket currencies with a unified euro in 2000. Currently the SDR consists of US dollars, Euros, pound sterling and the Japanese yen. Reviewing the SDR’s history of over 50 years, we can easily see that the SDR basket includes almost all the currencies of the five largest exporting countries in the world. In 2009, China began to use RMB for settlement in cross-border transactions, embarking on the road of RMB internationalization. IMF in 2010 SDR evaluation review assessed that China hadn’t met the freely usable criterion and inclusion of the RMB in the SDR was rejected, despite the fact that China was the second largest exporting country and its GDP ranked the third place in the world. Over the past five years, international economic and trade landscape have undergone complicated and profound changes. With China’s overall national strength increasing, RMB enjoys wide popularity among the international community and has become the fifth largest transaction currency in the world. So, RMB is already qualified to join the SDR basket. Currently IMF is conducting 2015 SDR evaluation review. China hopes RMB to join the SDR basket so that China can better assume the responsibility as a big country and increase the supply of global public goods. The international community responds positively and many countries believe that the IMF should do its part to advance the reform of international monetary system and RMB’s formal inclusion into SDR basket in 2016. RMB’s entry into the SDR basket will be a historic breakthrough in its internationalization process, helping remove concerns of international community over RMB’s prospects and changing the risk expectation and pricing mechanism of RMB. RMB’s inclusion in SDR is conducive to expanding its usage scope, achieving the scale of economy, reducing transaction costs and thus forming a virtuous circle of RMB internationalization. However, RMB’s inclusion in the SDR basket also has its risks. Firstly, the United States and IMF will probably ask China to meet the criterion of “a freely usable currency”. That’s to say, they will require China to completely deregulate items of the capital account and lifting restrictions on personal cross-border investments, securities trading and derivatives trading. Secondly the international demand for RMB will increase substantially, even making it the target of international speculative capitals. China’s monetary policy and macro-prudential management will be confronted with new challenges. The financial security and stability of real economy will also be threatened by hot money. Therefore China must stick to the bottom line of risk management in the internationalization of RMB and even after RMB’s inclusion in the SDR basket. Whenever necessary, China will never let go of capital flows that should be managed and effectively control the bad short-term capital flows. In the long run, only by keeping risks under control, safeguarding against future financial crisis and maintaining steady and sound economic development will we be able to lay a solid foundation for the internationalization of RMB.

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RMB Internationalization Report 2015: RMB is Very Likely to Join the SDR Basket in 2016

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