06 Nov China Accepted Into IMF
November 6, 2016, the headlines read, “China accepted into the IMF”. This means China’s currency will be added to the current list of currencies used to calculate the Special Drawing Rights (SDR).
A Little Background on China & IMF
- In 2010, China requests to be a member of the IMF and included in the Special Drawing Rights.
- The IMF said they would review their request at the next IMF meeting in 2015.
- Ahead of the IMF’s December 2015 meeting, China was told their request would be re-addressed well ahead of the next meeting.
- In February 2016, the IMF decided to include China’s currency into the Special Drawing Rights (SDR), effective November 1, 2016.
What’s a Special Drawing Right (SDR)?
Special Drawing Rights (s) are a temporary “market” to help nations meet their obligations in times of tight credit. Last week, the SDR was a basket of four currencies: USD, EUR, GBP & JPY. Chinese Currency is now part of the SDR basket. The SDR now includes five currencies: USD, JPY, EUR, GBP and CNY (yuan offshore Chinese currency)/RMB (mainland China). Note that all of the currencies in the SDR are fiat currencies. Read more about what that means here.
- SDRs are not an exchangeable currency
- SDR’s are an index of the component currencies
- SDR’s are “placeholders” for the obligations they cover.
- Read my previous blog from October 2015.
IMF Requirements because China accepted into the IMF:
The IMF’s requirements for China to be part of the IMF and the SDR are:
- Significant global trade with a wide array of trading partners
- A freely tradable & liquid currency that is widely used by individuals and commercial transactions
- A liquid capital market from a Euro deposit market to government and corporate bonds
- A Central Bank balance sheet that can provide instant liquidity
- China’s balance sheet must hold an amount of gold designated by the IMF, scaled to the size of the country’s economy.
- In addition to gold and currency, reserve status designation goes to countries with active bond markets in their home currency as well as the currency of their trading partners.
- N.B.: Another reason why China sold US Government Securities and bought bonds from other countries; They needed to lessen their focus on the trade balance and focus on having a diverse Central Bank Balance Sheet
The Global Currency Reset (GCR)
Global Currency Reset (GCR), the addition of CNY/RMB required a Global Currency Reset on the effective date for inclusion in the SDR.
Here’s what the new SDR basket:
The SDR includes both CNY & RMB with a combined weighting in the SDR of 10.92%
- CNY: Off-Shore RMB – Chinese currency which can be held offshore (in Hong Kong)
- RMB: On-shore RMB – Mainland currency, held in Mainland China.
With the US Elections 2 days away, most people have been in a risk-off position anyway. China’s evolution as a member of the IMF will be shown over time. As the first new member inclusion, China’s success with the IMF remains to be measured.