China’s RMB Included to the IMF’s SDR

Effective date China in SDR

China’s RMB Included to the IMF’s SDR

This weekend China’s on-shore currency, the RMB, to be included in the IMF’s Special Drawing Rights (SDR).  China’s currency inclusion to the SDR means the SDR’s value will be reset.  

What does China’s Currency Being Included in the Special Drawing Rights Mean?

Special Drawing Rights (SDR’s) are a basket of four currencies (USD, EUR, GBP & JPY). The percentage of each currency and the SDR basket is used by the IMF as a temporary source of funds to help nations meet their obligations. With China’s inclusion to the IMF, the Chinese Renminbi was added to the SDR basket, meaning the percentage of each currency in the SDR is to be reset.

N.B.: Special Drawing Rights are not a currency per se. They are a “placeholders” for the obligations they cover. Read my two previous blogs from October 2015 and February 2016.

What Are Special Drawing Rights?

The IMF’s requirements for a country’s currency to be considered for addition to the SDR are:

  • Significant global trade with a wide array of trading partners
  • A freely tradable & liquid currency that is widely used
  • A liquid capital market from a short-term Euro deposit market to a medium and long-term government and corporate bond market
  • A Central Bank balance sheet large enough and diverse enough to provide instant liquidity

The Central Bank’s balance sheet also needs to have an amount of gold as designated by the IMF and scaled to the size of the countries economy  

Here’s the IMF’s Factsheet on SDRs

China’s Gold

Goldman Sachs did a great piece on China’s Gold Holdings, which you can read here

  • In addition to gold and currency, reserve status is typically conferred to countries with active bond markets in their home currency as well as the currency of their trading partners. 
      • For many years China was the largest purchaser of US Treasury Bonds to offset the large number of purchases the U.S. made in Chinese-produced products. 
      • To be an optimal candidate for the SDR, China’s bond market would include bonds whose interest and principal are repaid in US dollars as well as other bonds denominated in Chinese Renminbi (RMB).  
  • N.B.: Recently, China sold US Government Securities and bought bonds from other countries; They needed to reduce their focus on trade balance and increase focus on having a diverse Central Bank Balance Sheet

 

The Global Currency Reset

The Global Currency Reset (GCR) to add the yuan (offshore Chinese currency) and the Renminbi (onshore Chinese currency) to the SDR re-adjusts the percentage of each currency in the basket.  

Here’s what the new basket will look like when the market opens this evening:

USD       41.72%

EUR      30.94%

CNY      10.92%

JPY       8.31%

GBP.    8.09%

SDR includes CNY (Off-shore Yuan) as well as RMB (On-shore Remnimbi) so 10.92% doesn’t surprise me 

Currency Reset Is King

Having said all of this, there are other issues taking place with respect to Southeast Asia.  

  • China has always kept their financial dealings closely held.  Therefore, the Global Currency Reset will be the first time we will see exactly what the PBOC holds.  This is in turn makes the Reset more interesting because:
    • The Trans-Pacific Partnership (TPP) & Debt Burden Liberation (DBL) have rattled the West’s nerves. Some of the concerns are reasonable
    • The Swiss-Indo Organization, the entity collecting and disseminating the DBL data will be hard at work as we anticipate whether the data clarifies China’s financial condition.  

I don’t see the addition of the CNY & RMB into the SDR as a yawner. If your company does business in China or as an investor you risk capital in China, I think reviewing your risk management strategy over the next few hours is a good idea.

SUMMARY

  • With the US Elections 2 days away, most people have been in a risk-off position anyway.  This will bring more noise to the market, muting any useful information “implied” by the after GCR currency action.  
  • This year and next promises to bring many changes on the currency and central banking landscape.  
  • Given the new market information and questions regarding the completeness, thereof three years forecasts of changes on the central bank landscape three years out are more likely than they typically five-year forecasts.  

 

  • CATEGORY: Derivative Products, Currency 

 

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