The International Monetary Fund (IMF) completed its review of the basket of currencies for the Special Drawing Right (SDR) and included the Chinese renminbi (RMB) for the first time. Effective 1 October 2016, as the fifth currency – after the US Dollar, euro, British pound, and Japanese yen – the RMB will be part of the SDR basket, which will be composed as below:
According to the IMF, the weighting formula is based on “the value of the issuers’ exports, the amount of reserves denominated in the respective currencies that were held by other members of the IMF, foreign exchange turnover, and international bank liabilities and international debt securities denominated in the respective currencies.” The move does confirm the country’s status and influence on the global financial and transactional stage.
The RMB’s inclusion in the SDR basket confirms China’s bid to gain further international legitimacy. Although a currency does not need to be in the SDR basket to be a reserve currency, the recent move is positive for the internationalization of the RMB. While the yuan was not tallied as a separate category in IMF’s COFER data, the Canadian Dollar and the Australian Dollar – neither of them are in the SDR basket – were shown to represent 1.9% and 1.7% of global allocated reserves as of the end of June 2015. With the acceptance as an international reserve currency, the yuan will likely be adopted by more central banks and trading partners as a reserve currency.
Implications
1) Development of China’s market-driven macroeconomic framework
The much anticipated move will encourage the Chinese authorities to continue their reform efforts. While the inclusion was based on IMF's definition of a “freely usable” currency[1], the authorities will likely continue its gradual but steady approach toward liberalization of the capital account and financial reform. Through such progressive efforts, the RMB movements will become increasingly market-oriented and, ultimately, fully convertible.
2) Interest rate-led currency movements
In the near term, the RMB’s volatility will likely stay moderate and should primarily reflect differences in interest rate movements among central banks. On the back of the moderate interest hike expected for the US, the yuan is anticipated to see slight depreciating pressure against the USD. On the other hand, with the European Central Bank expected to step up its monetary easing efforts, the yuan may be relatively strong against the euro.
3) Further developing Hong Kong’s offshore RMB market
Hong Kong remains the world’s top RMB offshore market, but other regions and international financial centres -- even prior to yesterday’s event – have been quickly developing their RMB services. This may explain why RMB deposits in Hong Kong have been declining, both in relative and absolute terms (see Chart 1). Consequently, there will be rising competition for Hong Kong’s leading position. To ensure we do not lose our crown, Hong Kong should enhance its role as the offshore RMB fixed income and treasury centre.
Chart 1 – Waning RMB deposits in Hong Kong
Source: CEIC data, HKGCC economic analysis
[1] A “freely usable” currency is defined in the IMF’s Articles of Agreement as a member’s currency that the Fund determines is, in fact, widely used to make payments for international transactions, and is widely traded in the principal exchange markets
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