06 Nov China Accepted To IMF & SDR
China included to the IMF
This weekend was the effective date for China’s acceptance to 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
- 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?
Special Drawing Rights (s) are used by the IMF as a temporary means of helping nations meet their obligations in times of tight credit. Last week, the SDR was a basket of four currencies: USD, EUR, GBP & JPY. Over the weekend, the Chinese Currency was added to the basket. The SDR now includes five currencies: USD, JPY, EUR, GBP and CNY (yuan offshore Chinese currency)/RMB (mainland China).
- SDRs are not an exchangeable currency
- SDR’s are an index of the component currencies
- They are used as a “placeholders” for the obligations they cover.
- Read my two previous blogs from October 2015 and December 2015
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
- Their balance sheet also needs 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 is typically conferred 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 trade balance and focus on having a diverse Central Bank Balance Sheet
THE GLOBAL CURRENCY RESET (GCR) & IMF MEMBERSHIP
Global Currency Reset (GCR), the addition of CNY/RMB was a Global Currency Reset with respect to the effective date for inclusion in the SDR.
Here’s what the new basket will look like when the market opens this evening:
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 which can only be held and transacted on Mainland China.
TRANS-PACIFIC PARTNERSHIP (TPP)
Having said all of this, there are other issues taking place with respect to the TPP (Trans-Pacific Partnership) & Debt Burden Liberation that are non-trivial to China’s IMF membership. Some of the concerns are reasonable. Asia – China, in particular – has always been a lockbox concerning financial dealings.
I don’t see the addition of the CNY & RMB into the SDR as a yawner. I think reviewing your risk management strategy over the next few hours is a good idea.
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.