Renminbi Inclusion in SDR—More about Financial Reform
The International Monetary Fund (IMF) will decide soon whether or not to add the renminbi to its Special Drawing Rights (SDR) basket. The Fund's review of this issue last summer focused on two issues. The first, referred to as the gateway criterion, was a simple matter. China met this criterion as early as 2010 by virtue of its large share in global exports, which has expanded since the previous review five years ago. The second criterion is whether or not the renminbi is freely usable. The Fund's review examined a number of metrics on usability of the Chinese currency, while acknowledging that some of these indicators have shortcomings. Most of the metrics on international financial transactions showed rapid increase in the use of the renminbi but from a relatively low base. Most important, the report pointed to a number of areas where additional financial reforms would enhance the free usability of the renminbi. Note that convertibility of a currency is not a criterion for free usability.
The People's Bank of China (PBoC) immediately began taking steps to address the operational issues highlighted in the IMF report. It announced that foreign central banks, sovereign wealth funds, and international financial institutions (and agents representing these institutions) would have direct access to the domestic interbank bond market, allowing them to freely buy and sell renminbi-denominated securities. Shortly thereafter it announced that these institutions would have direct access to the onshore foreign exchange market, which provided them with access to renminbi-denominated instruments for reserve management purposes and allowed them to hedge currency risk. On August 11 the central bank announced reforms in the daily fixing of the central parity of the renminbi against the dollar, with a view to making the value of the Chinese currency more market determined.
The Chinese government also came into compliance with the Fund's Special Data Dissemination Standard (SDDS), improving the availability of various economic indicators. Also in the summer of 2015 the PBoC began publishing data on its foreign exchange reserves, consistent with the IMF's template on international reserves and foreign currency liquidity. It also stepped up substantially its issuance of three-month bills, in effect providing a three-month interest rate instrument that can be included in the three-month SDR interest rate basket. The authorities also opened the Cross-Border Interbank Payment System (CIPS) to further develop the cross-border and offshore renminbi market and canceled the upper ceiling on benchmark deposit rates.
In short, the PBoC continued to actively pursue the renminbi's inclusion in the SDR basket through further liberalization of the exchange- and interest-rate regimes and quickly addressed the operational issues identified in the Fund's report. That led the Fund, in a more recent analysis (not yet public), to recommend inclusion of the renminbi in the SDR basket.
Will the inclusion of the renminbi in the SDR basket significantly increase demand for renminbi-denominated assets? Not necessarily, at least in the short run. Sometimes the inclusion of a currency in the basket is conflated with becoming a reserve currency. However, this is not the case. The currency composition of the reserve assets held by central banks around the world is a decision for each bank. Only a few benchmark their holdings to the weights of the various currencies in the SDR basket. Thus, inclusion of the renminbi in the SDR basket does not automatically lead central banks to diversify their reserve assets into renminbi-denominated securities. But over time official holdings of renminbi-denominated assets are likely to rise and, according to some reports,1 could constitute as much as 5 percent of global reserves by 2020.
1. Standard Chartered, "CNY—What happens after the SDR review?" October 29, 2015. On file with author.