IMF discusses whether to include RMB into SDR today

International Monetary Fund (IMF) will discuss whether to include RMB into the Special Drawing Rights (SDR) in the meeting held by the board of executive director on Nov. 30, and Lagarde, managing director of IMF, will host this meeting, making RMB closely watched by the world again. RMB is more likely to be included into the SDR basket this time according to the analysis, further pushing RMB’s internationalization process.

Handelsblatt learnt from insiders that IMF clearly stated that most shareholders will vote to support the SDR basket include RMB on Nov. 30. And based on the report, the USA will also vote to support this decision.

RMB more likely to be included into SDR

Currency basket of the SDR is reviewed every five years. During the review in 2010, IMF believed that RMB met one of the two requirements to be included into the SDR: China’s export trade scale was big enough, but RMB did not meet the other one: currency should be convertible.

China has proposed the review again in this year, and meanwhile issued a series of measures to speed up the market-oriented process of RMB, for example, China publishes the currency formation of foreign exchange reserve, opens the interbank bond market and foreign exchange market to central banks of foreign nations, IMF and sovereign wealth fund, improves the offering system of middle rate for RMB exchange rate, adopts IMF’s special standard of data publication, and publishes related statistics based on this standard.

Lagarde made a declaration on the issue that RMB is included into the SDR publicly at the middle of November. According to this declaration, IMF staff believed that RMB meets the requirement of “convertible currency” after the assessment. Therefore, the staff suggested the board of executive directors recognize the convertibility of RMB, and include it into the SDR basket as the fifth currency after UK sterling, Euro, Japanese yen, US dollar.

Lagarde’s declaration can be regarded as IMF’s latest assessment on RMB, laying a foundation for RMB’s possibility to be included into the SDR.

Financial reform to be promoted

Currently, analysts believe that it will be a choice beneficial to various parties, drive reforms of the IMF and SDR, and meanwhile boost the RMB’s internationalization, if RMB is finally included into the SDR basket at the end of this month to be the fifth currency.

Standard Chartered Bank estimated that the inclusion of RMB into SDR will attract capital amounted to four to seven trillion yuan (equivalent to 626 billion to 1, 1 00 billion US dollars) to China in the next five years. Moody indicated that it will be an advantage for China’s credit rating. Standard Chartered Bank has increased its RMB position from 1 percent to around 5 percent in the meantime.

In anticipation that RMB will soon be added to SDR, it is reported that some experts has started to estimate the weight of RMB in SDR currency basket. Result from the calculation of members of IMF in July this year showed that the weight might range from 14 percent to 16 percent. HSBC also estimated that this weight will fall around 14 percent.

However, insiders indicated that decision makers of IMF are considering modifying the computing method of the weight of a currency in its currency basket, and lowering the proportion of export share. As a result, the weight of RMB may be lower than that calculated according to current formula. Nevertheless, a former IMF official believed that the weight of RMB in SDR basket may still surpass UKsterling and Japanese yen, but not more than US dollar and Euro. Information shows that the current weight composition of SDR basket is as the following: US dollar 41.9 percent, Euro 37.4 percent, UK sterling 11.3 percent and Japanese yen 9.4 percent. 

Speaking of the influences of including RMB into SDR, IMF indicated that free utilization of RMB will contribute to advance China’s financial reform. British newspaper Financial Times published an article, which said the inclusion of RMB in SDR is not just a symbolic move, but in the short term it can hardly arouse the enthusiasm in the market.

Even though IMF may accept SDR this time, but the implementation will be in 2016 and the financial market has enough time to respond to this change. Currently some large banks believe that RMB exchange rate will face pressure of a new round of depreciation or one-off depreciation after it joined SDR. But some other economists disagree with this opinion.

Analyses showed that in the mid-long term, diversified choices in the global market will benefit RMB. The use of RMB as a reserve currency will support the mid-long term trend of RMB exchange rate. Zhang Ming, head of international investment office of institute for international economics at Chinese Academy of Social Sciences, anticipated that demand for RMB assets will not exceed 30 billion yuan in the short term after RMB joined the SDR.