The weight of RMB is raised!
According to the website of the People’s Bank of China, on May 11, 2022, the Executive Board of the International Monetary Fund completed the five-year review of the SDR. This is the first review since the RMB became the SDR basket currency in 2016.
The Executive Board unanimously decided to keep the current SDR basket currency composition unchanged, that is, it still consists of USD, EUR, RMB, JPY and GBP.And the weight of RMB was raised from 10.92% to 12.28% (an increase of 1.36 percentage points).The weight of the US dollar was raised from 41.73% to 43.38%, while the weight of the euro, the yen and the pound was lowered from 30.93%, 8.33% and 8.09% to 29.31%, 7.59% and 7.44% respectively, and the weight of the RMB remained the third. The Executive Board decided that the new SDR currency basket will come into effect on August 1st this year, and the next SDR valuation review will be conducted in 2027.
China’s confidence and will in reform and opening up will not waver, and it will always persist in opening up to the outside world at a high level. In the next stage, the People’s Bank of China, together with various financial management departments, will continue to unswervingly promote the reform and opening up of China’s financial market, further simplify the procedures for foreign investors to invest in China market, enrich the types of investable assets, improve data disclosure, continuously improve the business environment, extend the trading hours of the inter-bank foreign exchange market, continuously improve the convenience of investing in China market, and create a more favorable environment for foreign investors and international institutions to invest in China market.
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On November 30, 2015, the Executive Board of the International Monetary Fund decided to include RMB in the Special Drawing Rights (SDR) currency basket, and the SDR currency basket was correspondingly expanded to five currencies: US dollar, euro, RMB, Japanese yen and British pound. The weight of RMB in the SDR currency basket was 10.92%, and the weights of US dollar, euro, Japanese yen and British pound were 41.73%, 30.93% and 8.33% respectively.
1. What is SDR?
SDR is the abbreviation of SpecialDrawing Rights, which means the right to exchange "freely usable" currency. It is a supplementary reserve asset created by the International Monetary Fund (IMF) in 1969. Together with other reserve assets such as gold and foreign exchange, it constitutes international reserves. SDR is also used as the accounting unit by IMF and some international institutions.
At the beginning of its creation, SDR was equivalent to the US dollar. After the collapse of the Bretton Woods system, the IMF launched the SDR currency basket in 1974. Before the 2015 review, the SDR currency basket included four major international currencies: the US dollar, the euro, the British pound and the Japanese yen. According to the exchange rate on November 30, 2015, one SDR unit is equivalent to about $1.37217.
2. What is the scale and usage of the existing SDR?
The IMF allocates SDR to all member countries according to their share to supplement their reserve assets.
The IMF made two general allocations of SDR in 1970-1972 and 1978-1981. After the global financial crisis broke out in 2007, the IMF allocated 182.6 billion SDR in 2009 to better cope with the crisis. Up to now, the cumulative allocation of SDR by IMF is about 204.1 billion SDR (about 280.1 billion US dollars). The cumulative allocation of SDR in China is 6.9897 billion SDR.
At present, SDR is mainly used for transactions between IMF member countries and official institutions such as IMF and international financial organizations, including using SDR in exchange for freely usable currency, using SDR to repay the IMF, paying interest or paying share to increase capital.
3. What is SDR review?
The IMF usually conducts a routine review of SDR every five years, mainly focusing on the currency composition and weight of SDR currency basket.
The principles of SDR review include: (1) the value of SDR remains stable with the world’s major currencies; (2) The currencies included in SDR basket should be widely used in international transactions; (3) The weight of currencies included in the SDR basket should be equal to its position in the international trade and financial system; (4) If there are no major changes, the composition of SDR basket currencies should remain stable during the two review periods; (5) The 5)SDR review method should be continuous and adjusted only when the role of money in the world economy changes significantly.
4. What are the criteria for becoming an SDR basket currency? What is the standard of RMB?
The current SDR review includes two criteria: first, the export scale, that is, the export volume of goods and services of a country or region in the first five years of the inspection period ranks among the top in the world; Second, the currency is "freely usable", that is, it is widely used in international transaction payment and widely traded in major foreign exchange markets. In practice, it is mainly measured by the proportion of currency in global foreign exchange reserves, international banking liabilities, international debt securities, cross-border payment, trade financing and trading volume in major foreign exchange markets.
At the time of SDR review in 2010, China had met the export standards. Since 2010, the internationalization of RMB has developed rapidly, and the degree of free use has been continuously improved. Based on various evaluation indicators, the Executive Board of IMF believes that there is sufficient basis to identify RMB as a free currency, and decided to include RMB in the SDR currency basket in 2015.
5. What is a "freely usable" currency?
"Free use" refers to being widely used in international transaction payment and widely traded in major foreign exchange markets. In practice, it is mainly measured by the proportion of money in global foreign exchange reserves, international banking liabilities, international debt securities, cross-border payment, trade financing and trading volume in major foreign exchange markets.
Free use is different from capital account convertibility. Capital account convertibility is neither a sufficient condition nor a necessary condition for free use. First, the issuing country that can freely use the currency can still retain restrictions on certain capital projects; Secondly, many convertible currencies are not freely usable currencies. However, the free use standard implies the requirement for a certain level of capital account convertibility; Convertibility of capital account can also improve the degree of free use.
(Source: China People’s Bank website)
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Editor | Li Huiying
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