Why should the RMB be included in the SDR basket?

[TaiShang]

Why should the RMB be included in the SDR basket?

The international community has been paying much attention to the possible inclusion of the renminbi, or the yuan, in the Special Drawing Rights basket of reserve currencies by the International Monetary Fund. IMF Managing Director Christine Lagarde said during her recent visit to China that progress in the renminbi internationalization in the past few years has basically brought the yuan to the criterion of a freely usable currency, and the inclusion of the yuan in the SDR basket is not “a question of if” but “a question of when”. On May 29, the G7 leaders reached a consensus that the yuan should be part of the IMF’s basket of reference currencies, but technical reviews should be completed first.

During the IMF technical reviews, the renminbi will have to meet two conditions before it could be included. The first: whether or not the value of the exports of goods and services in the five years prior to the reviews is one of the biggest in the world. The SDR basket of currencies now includes the dollar, euro, pound sterling and yen; this means that China’s export value of goods and services should be higher at least than that of Britain or Japan.

China’s foreign trade amounted to 25.42 trillion yuan (US$4.17 trillion) in 2012, ranking second in the world; in 2013, total foreign trade was valued at 25.83 trillion yuan, overtaking the United States to become the biggest in the world; and in 2014, China’s foreign trade value increased further to 26.43 trillion yuan, still ranking the largest in the world. The five-year average value of China’s foreign trade always ranks among the top. That is to say, China can now basically satisfy this criterion of the IMF for the technical reviews.

The second important condition is that the renminbi must meet the criterion of a freely usable currency under IMF Article XXX(f), that is, widely used to make payments for international transactions and widely traded in the principal foreign exchange markets. This criterion could be divided into four specific indicators: The weight in the composition of the official IMF foreign exchange reserve currencies; the Bank for International Settlements statistics on international banking liabilities and cross-border deposits; the BIS statistics on global bond markets; and the BIS statistics on global foreign exchange market transactions. During the 2010 technical reviews, the renminbi failed to be accepted due to its weakness in the first and fourth criteria.

At present, the renminbi has shown its strength in cross-border deposits and foreign exchange market transactions. At the end of 2014, the amount of offshore renminbi deposits stood at about 2.8 trillion yuan, next only to the four SDR reserve currencies. Also at the end of 2014, the renminbi fared very well in the foreign exchange market transactions, ranking sixth among all currencies.

But the renminbi still shows its weakness in terms of the holdings as foreign exchange reserves and the size in the international bond markets. According to statistics on the Canadian dollar and Australian dollar conducted separately by the IMF effective from 2013 under the first criterion, the proportion in the official foreign exchange reserves among the global currencies was about 1.5%, respectively. Judging from this level, the proportion of the renminbi holdings by central banks around the world as their foreign exchange reserves is probably lower than that ratio. But considering that more than 40 central banks or monetary authorities around the world have included or plan to include the renminbi as a currency of their foreign exchange reserves, and that they can buy renminbi assets through such channels as the offshore market, it is estimated that the ratio of the renminbi is approaching the 1.5% level. As for the fourth criterion, the balance of the offshore renminbi bond markets at the end of 2014 was about 480 billion yuan, accounting for 0.4% of the international bond markets, and this proportion was still fairly low.

The two criteria all had, to a great extent, a bearing on the failure for the inclusion of the renminbi into the SDR basket. If the renminbi could be included in the SDR basket of reserve currencies, it would mean that the IMF endorses the renminbi as an international currency, and then it would be significant changes in the two criteria for the renminbi and would be fairly easy for the renminbi to meet the IMF technical standards. In this sense, the probability for the renminbi to pass the technical reviews for its inclusion in the SDR basket would be very high.

Even if the renminbi passes the IMF technical reviews for its SDR inclusion, the stance of the US government and attitude of the US Congress on renminbi’s inclusion in the SDR basket will directly affect the final decision on its inclusion. The US government has recently stated that it would agree to include the renminbi in the SDR basket if it would pass the IMF technical reviews. The attitude of the US Congress, however, is still unknown. If the US Congress unilaterally opposes its inclusion, it would be up to the game outcome between the Chinese government and the US Congress to solve the technical hurdle for renminbi inclusion in the SDR basket.

If the renminbi could be included in the SDR basket of currencies, it will not only be a recognition of China’s ever-rising status in the global economy and financial market, but will also mean that more countries will use the renminbi as one of their reserve currencies, thus further speeding up the renminbi international process. The inclusion will be of both symbolic and substantive significance. This is what the Chinese government wants to achieve.

More importantly, if the renminbi is accepted as a currency in the SDR basket under the current circumstances, it will mean an official IMF endorsement of the renminbi as an international currency, even if the renminbi has yet to achieve the goal of free convertibility and the capital account is yet to open completely. This will, on the one hand, clear the technical hurdles for central banks across the world to hold the renminbi as an international reserve currency, and help elevate the status of the renminbi on the international markets in terms of cross-border transactions and investment settlements, and on the other hand, it will help lower the financing costs for Chinese enterprises on the international markets and promote reforms of China’s financial market. Furthermore, it will also help mitigate potentially huge risks deriving from the call for inclusion of the renminbi into the SDR currency basket only after completely free convertibility.

According to the 1994 plan, the goals of opening the capital account and achieving the renminbi free convertibility should have been completed in 1997, but due to the Asian financial crisis in 1997, the Chinese government changed and deferred the plan. Today, even 18 years after the financial crisis, the two tasks are still progressing very slowly. The fundamental reason for the slow progress is: the government finds it unpredictable about the degree of external impacts and the consequences from the opening of the capital account and the renminbi free convertibility. Under the current situation, if the renminbi is included in the SDR basket of currencies, it will mean an endorsement of the renminbi as an international reserve currency, and at the same time, the Chinese government will have the power and capacity to steer and manage the renminbi exchange rate. This is really what the Chinese government has been hoping for.

 

[Keel]

As highlighted the yankies PLUS Japan will vote down the proposal
and our Capital Account is yet fully convertible

Time for the die-hard Chinese Japan-worshippers to cheer for when this happens

Clay-figurine Zhang, Tianjin

 

[hellraider]

As highlighted the yankies PLUS Japan will vote down the proposal
and our Capital Account is yet fully convertible

Time for the die-hard Chinese Japan-worshippers to cheer for when this happens

Clay-figurine Zhang, Tianjin

China can never have full capital account convertibility. Your government is too scared to lose control.

 

[Keel]

China can never have full capital account convertibility. Your government is too scared to lose control.

I believe India itself is not having a full convertibility in its capital account too
are you scared of your allies in uSA, Japan and the west?

THe time will come sooner for China than the bragging Indians for full capital account convertibility
But there are other issues compounding the above topic which go beyond the convertibility of the capital account

China Print Art Painting

 

[hellraider]

I believe India itself is not having a full convertibility in its capital account too
are you scared of your allies in uSA, Japan and the west?

THe time will come sooner for China than the bragging Indians for full capital account convertibility
But there are other issues compounding the above topic which go beyond the convertibility of the capital account

China Print Art Painting

India has less restriction on capital account than China. India is moving faster towards capital account convertibility than China and will have it before China.

 

[TaiShang]

RMB globalization highlights balance between stability and reform
By Sun Lijian
Shanghai Daily, June 26, 2015

​

[By Jiao Haiyang/China.org.cn]


The yuan has emerged as the fifth most-used currency in international business transactions, with 2.07 percent of the global payments made in the yuan in April. The trend is stronger in the Asia-Pacific region, where the yuan has emerged as the first-choice payment currency in China’s mainland and Hong Kong, while only three years ago it ranked a distant fifth in terms of popularity as a currency for payment.

The Hong Kong and Shanghai Banking Corporation has even predicted that the yuan will replace the yen as the most-used currency in Asia by the second quarter of this year.

The yuan is no longer under-valued and it is a matter of time before it joins the IMF’s Special Drawing Rights (SDRs) club. Once the yuan is included in SDRs, central bankers all over the world will naturally increase their holdings of the yuan in their foreign exchange reserves, a move that will likely help to stabilize its value.

What’s more, the yuan’s cemented role as a payment and reserve currency will inevitably lead to its greater influence in setting global commodity prices. At present, it has minimal influence compared to that commanded by the US dollar and the euro.

The yuan’s internationalization is also hugely important in light of the need for asset security, which is a key concern of Chinese businesses with global aspirations. And this concern is increasingly desperate in the wake of the 2008 global financial crisis, prompting Chinese authorities to moot the strategy of elevating the yuan’s global status.

A series of efforts, such as allowing for the yuan’s cross-border use in the Shanghai Free Trade Zone, currency swap deals featuring the yuan, the establishment of the Silk Road Fund and the Asian Infrastructure Investment Bank, have underscored China’s commitment to promote the yuan as a global currency in an organized way.

Risk control

Nonetheless, I’d like to shed light on some fundamental changes in the yuan’s internationalization which merit due attention.

Since risks abound of speculators making arbitrage gains from exchange rate differences, thanks to a unilaterally rising yuan, the Chinese government proceeded with great care in their previous bid to globalize the currency.

But today, not only Chinese firms themselves are eagerly engaged in yuan settlement in cross-border trade, their overseas partners no longer shy away from involvement in yuan-related business.

However, I do feel that although expectations for a stronger yuan are generally high, both at home and abroad, the ways to achieve that goal are perhaps seen in broadly different terms.

While the idea of building a financial infrastructure conducive to the yuan’s globalization holds some sway, Chinese authorities continue to insist on “risk controllability” as the primary prerequisite for financial deregulation and institutional reforms.

Only when cross-border use of the yuan and cash flows are stable and secure can the currency avoid the same tragic fate that befell the yen and the euro, both of which suffered severe setbacks in their internationalization processes.

However, the priority given to risk control is precisely where market observers think China should improve, and it is giving ammunition to the US, which is opposed to a stronger yuan because of its debilitating impact on the dollar.

The contrast between efficiency, favored by the market, and stability, emphasized by the government, has never been starker amid an anemic global economy and excessive liquidity in the financial market.

True, China’s financial regulators can push through parallel reforms in liberalizing the capital market and freeing up the capital account, so as to strengthen their risk control ability, but as long as these two reforms remain separate, risk assessment can only be inadequate and inaccurate. In short, the yuan’s foothold in overseas markets will be flimsy if the two major reforms proceed independently of each other.

The fragility of China’s financial system constrains the innovation ability and blunts the competitive edge of Chinese companies. Therefore, the ongoing financial reform spearheaded by established big players, like the Big Four state-owned banks, will be limited in its effects.

Driving Chinese financial reform by creating a more open capital market and introducing formidable foreign competitors is thus a painful yet much-anticipated option. The snag is, in the case of delayed financial reforms as well as sluggish investments in the real economy, the market will certainly be distorted in favor of those speculators bent on making arbitrage gains.

Policy implications

Here are some policy suggestions.

First, while there is little disagreement on boosting the yuan’s international clout, consensus on how to realize this ambition is increasingly elusive. The key is to use China’s dollar reserves efficiently and lay an overseas groundwork for the yuan’s involvement in global trade and investment.

Secondly, evaluation of the yuan’s global heft cannot depend solely on the amount of yuan payments done abroad; rather, it should rely more on building a healthy financial infrastructure at home.

Thirdly, we ought to address timely the twin conundrums of industrial upgrading and financial distortions, so as to speed up the capital account liberalization before the next market boom arrives.

The author is executive dean of the School of Economics at Fudan University. The views are his own. Shanghai Daily staff writer Ni Tao translated his article from Chinese.

 

[Keel]

India has less restriction on capital account than China. India is moving faster towards capital account convertibility than China and will have it before China.

I am not sure if Indian's situation is better

But no one wants to hold Indian rupees which have been losing value during the past decades except for some of the Indian extremists and your central bank
Also you dont have much amunition to fend off an INR onslaught by international sharks. On top of these, the size of your international trade, barring arms purchases, is relatively small

Enough said

Clay figurine Zhang - Tianjin

 

[TaiShang]

I am not sure if Indian's situation is better

But no one wants to hold Indian rupees which have been losing value during the past decades except for some of the Indian extremists and your central bank
Also you dont have much amunition to fend on an INR onslaught by international sharks. On top of these, the size of your international trade, barring arms purchases, is relatively small

Enough said

Clay figurine Zhang - Tianjin

Plus doing business in India is a horrible experience. Aside from rampant corruption, the infrastructure sucks big time and the workforce is well under mediocre.

Hence nobody debates whether to include Rupee in SDR.

@Beidou2020

 

[Beidou2020]

Indian currency is a joke. It's irrelevant in the world. It's losing value as the fundamentals of the Indian economy are horrendous. India is irrelevant in global trade and its currency will never become a reserve currency.....EVER!

 

[hellraider]

I am not sure if Indian's situation is better

But no one wants to hold Indian rupees which have been losing value during the past decades except for some of the Indian extremists and your central bank
Also you dont have much amunition to fend on an INR onslaught by international sharks. On top of these, the size of your international trade, barring arms purchases, is relatively small

Enough said

Clay figurine Zhang - Tianjin

Who told you no one is interested in Indian currency. Our central bank has to restrict flows in rupee debt market as there is excessive demand for Indian Bonds.

Plus doing business in India is a horrible experience. Aside from rampant corruption, the infrastructure sucks big time and the workforce is well under mediocre.

Hence nobody debates whether to include Rupee in SDR.

@Beidou2020

Thats why growth rate of India is higher than China.

Indian currency is a joke. It's irrelevant in the world. It's losing value as the fundamentals of the Indian economy are horrendous. India is irrelevant in global trade and its currency will never become a reserve currency.....EVER!

We are not interested in making rupee a reserve currency. It means nothing. We are happy with foreign investors having confidence in our currency.

 

[Keel]

Who told you no one is interested in Indian currency. Our central bank has to restrict flows in rupee debt market as there is excessive demand for Indian Bonds.
Thats why growth rate of India is higher than China.

a weak currency usually increase interest rates for attracting the purchase of its currency
Indian ruppees fit the bill

Indian growth rate is higher than China only because Indians economy size is only 1/5 of China's

Some of these countries below have tremendous growth rates why you do not downsize your economy for a much better growth rate?
List of countries by real GDP growth rate - Wikipedia, the free encyclopedia

Shanghai Ballet Company

 

[Beidou2020]

Who told you no one is interested in Indian currency. Our central bank has to restrict flows in rupee debt market as there is excessive demand for Indian Bonds.


Thats why growth rate of India is higher than China.


We are not interested in making rupee a reserve currency. It means nothing. We are happy with foreign investors having confidence in our currency.

Foreign investors have so much confidence in the Indian currency that it has collapsed from 40 to 65
The only reason it hasn't collapsed further is because India has been using its reserves to support the Rupee.

Indian economic fundamentals are awful with constant current account deficits and budget deficits. India has a tiny amount of forex reserve to support its economy.

India is highly bureaucratic and ultranationalistic which prevents India from ever becoming a manufacturing and trading powerhouse like China.

China is growing 7% to a $10 TRILLION economy.
India is growing 5% (excluding the Vedic math recalculation which no one believes) to a $2 Trillion economy.

China is growing faster than India in terms of % and in absolute GDP added per year.

 

[hellraider]

a weak currency usually increase interest rates for attracting the purchase of its currency
Indian ruppees fit the bill

Indian growth rate is higher than China only because Indians economy size is only 1/5 of China's

Some of these countries below have tremendous growth rates why you do not downsize your economy for a much better growth rate?

India has a stable currency since 2013 & will remain stable in future. In foreseeable future India will grow at a rate of 2% higher than that of China. So we will close the gap with China and even overtake. You should concentrate on coming crisis in China than on India.

 

[Beidou2020]

India has a stable currency since 2013 & will remain stable in future. In foreseeable future India will grow at a rate of 2% higher than that of China. So we will close the gap with China and even overtake. You should concentrate on coming crisis in China than on India.

India has been using its reserves to sell dollars and buy Rupees to support the exchange rate.

China adds nearly $1 TRILLION to its economy every year.
Good luck closing that gap

Not even Vedic math can help you out.

 

[hellraider]

Foreign investors have so much confidence in the Indian currency that it has collapsed from 40 to 65
The only reason it hasn't collapsed further is because India has been using its reserves to support the Rupee.

Indian economic fundamentals are awful with constant current account deficits and budget deficits. India has a tiny amount of forex reserve to support its economy.

India is highly bureaucratic and ultranationalistic which prevents India from ever becoming a manufacturing and trading powerhouse like China.

China is growing 7% to a $10 TRILLION economy.
India is growing 5% (excluding the Vedic math recalculation which no one believes) to a $2 Trillion economy.

China is growing faster than India in terms of % and in absolute GDP added per year.

Indian currency has been appreciating on inflation adjusted basis if you know anything of this concept.

Our current account deficit is just 1% of GDP now and nothing to worry about. Budget deficit is under control & debt to GDP ratio constant. We need not worry.

Fact is China overestimates its economy & India is conservative. In foreseeable future we will grow at a rate 2% higher than China & soon close the gap with China & even go ahead.