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Analysis of the RMB’s Chance to be Included in the SDR

The International Monetary Fund (IMF) will unofficially begin its quintuple review of the SDR basket this May, with official result to be respected in October, and implementation at the beginning of 2016. Taking into account of the progress made in China’s financial reforms and the RMB’s internationalization in the past several years, the market is generally optimistic about the RMB’s chance to make it into the SDR basket this time around. However, the RMB will have to qualify as a freely usable currency as defined by the IMF, and overcome the possible veto of the US. The former requirement is attainable, with uncertainties presented by the latter. Given that the US Congress has stalled in authorizing the US Government to participate in the IMF reforms in the past several years, it remains a formidable obstacle.

Requirements

In 2010 when the IMF reviewed the SDR currencies basket, it took great pains to examine and analyze whether the RMB met its requirements, and the RMB was the only currency being seriously considered at the time. To qualify, a currency has to meet two criteria, the first being that its exports of goods and services during the five-year period ending 12 months before the effective date of the revision have the largest value. As the SDR contained four currencies, the US dollar, the Euro, the British Pound, and the Yen, it implies that China’s goods and services exports would have to surpass those of the United Kingdom and/or Japan. China met this criterion in 2010, as it was the world’s third largest exporter of goods and services at that time. The second criterion is that it has to be determined by the IMF under Article XXX (f) to be a freely usable (FU) currency. In 2010, the IMF concluded that the RMB had not met this requirement, and thus decided to maintain status quote.

It is worth noticing that IMF, in its own report, clearly states that the concept of a freely usable currency concerns the actual international use and trading of currencies, and is distinct from whether a currency is either freely floating or fully convertible. In other words, the facts that the RMB is not yet fully convertible, China still imposes capital controls, and the related RMB exchange rate mechanism shall not be considered obstacles to the RMB’s path into the SDR. To determine whether a currency is widely used for international payments or widely traded, IMF referred to four quantitative indicators.

The first indicator was the Currency Composition of Official Foreign Exchange Reserves (COFER) complied by the IMF itself. The statistics show that the four SDR currencies accounted for 96.1% of allocated forex reserves in the world in 2010. The RMB was not tallied individually, becoming part of other currencies that had a share of 3.8% of the total. The second indicator was the international banking liabilities compiled by the Bank of International Settlements (BIS). It shows that in the previous five years, the four SDR currencies accounted for 91.7% of the total. Again, the RMB was not separately accounted for, becoming part of other currencies that had a share of 7.3% in 2009. The third indicator was the international debt securities statistics also compiled by BIS. It shows that the four SDR currencies accounted for 94.6% of the total in the previous five years, while the RMB’s share being only 0.06% (2009), lower than those of Swiss Franc, Australian dollar, and Canadian dollar who all had shares of more than 1%. The fourth indicator being used was global forex markets turnovers captured by BIS’ Triennial Central Bank Survey. It shows that the four SDR currencies accounted for 77.6% of the total from 2007 to 2010, while the RMB’s share being 0.1%, again lower than those of Swiss Franc, Australian dollar, Canadian dollar, Hong Kong dollar, and Swedish Krona who all had shares of more than 1%.

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Content provided by Bank of China (Hong Kong)
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