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IMF Adds Renminbi to SDR Basket

8piCF9Uj60r8WtepADVx1l4rt1i1tSAG4WqOx47NToday the International Monetary Fund (IMF) executive
board completed its regular five-yearly review of the basket of currencies that
makes up the Special Drawing Rights (SDR) basket and decided that the Chinese
renminbi (RMB) meets the existing criteria to be included in the basket.

Effective October 1, 2016, the RMB will become the fifth
currency in the SDR basket, alongside USD, EUR, JPY and GBP. The IMF says that
launching the new currency basket on this date will give the fund, its members
and other SDR users sufficient time to adjust to this change.

At the conclusion of today’s board meeting, Christine
Lagarde, managing director of the IMF, stated: “The Executive Board’s decision
to include the RMB in the SDR basket is an important milestone in the
integration of the Chinese economy into the global financial system. It is also
a recognition of the progress that the Chinese authorities have made in the
past years in reforming China’s monetary and financial systems. The
continuation and deepening of these efforts will bring about a more robust
international monetary and financial system, which in turn will support the
growth and stability of China and the global economy.

“The value of the SDR will be based on a weighted
average of the values of the basket of currencies comprising the US dollar,
euro, the Chinese renminbi, Japanese yen, and British pound. The inclusion of
the RMB will enhance the attractiveness of the SDR by diversifying the basket
and making it more representative of the world’s major currencies.

“The SDR interest rate will continue to be
determined as a weighted average of the interest rates on short-term financial
instruments in the markets of the currencies in the SDR basket.
Authorities of all currencies represented in the SDR basket, which now includes
the Chinese authorities, are expected to maintain a policy framework that
facilitates operations for the IMF, its membership and other SDR users in their
currencies. The paper presented to the Board will be released soon.”

The addition of the RMB to the SDR basket comes at a time when trading volumes in the Chinese currency are rising. Last month, Tradition’s ParFX platform said CNH was the fifth most traded currency on the platform while volumes are also rising on EBS.

“On the EBS market platform, USDCNH is now a top three currency pair, up from top 15 in 2013,” says Darryl Hooker, global co-head of EBS Brokertec Markets. “Average daily volumes in 2015 are double those executed in 2014, with counterparts from over 20 countries active every day. The SDR’s recognition of the renminbi as a reserve currency should only encourage this growth trend to continue.

“Today’s decision by the IMF is a key milestone in the internationalisation of the currency,” Hooker adds. “The speed at which the renminbi has reached major currency status on the global stage has been unparalleled.”     

galen@profit-loss.com          Twitter: @Galen_Stops

 

Galen Stops

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