The Chinese yuan is finally gaining entry to an exclusive club: getting the International Monetary Fund’s special drawing rights designation. The SDR is an international reserve asset created by the IMF in the late sixties “to supplement its member countries’ official reserves.” The IMF’s Executive Board changes the SDR’s basket currency composition every 5 years. The yuan joins the U.S. dollar, the euro, the Japanese yen, and the British pound.
The inclusion, which is effective October 1, 2016, “was taken in the context of the Review of the Method of Valuation of the SDR, which takes place every five years,” said Siddharth Tiwari, director of the IMF’s Strategy, Policy, and Review Department, in a release. “These reviews typically evaluate the selection criteria for the currencies that should be part of the basket, the selection of currencies, the weighting methodology, and the composition of the basket.”
“The RMB’s inclusion is an important milestone in the integration of the Chinese economy into the global financial system. Andrew Tweedie, director of the IMF’s Finance Department.
The RMB is been making steady progress making itself into an international currency over the past several years. And the ongoing internationalization has brought numerous opportunities to foreign enterprises, including trading firms and banks, to hedge foreign exchange risks and benefit from strong RMB appreciation (although it’s been struggling a bit in 2016). For foreign sellers and exporters, including the flexibility of invoicing in RMB can extend their reach to the Chinese consumer, reduce supply chain costs, and optimize supply chain management. It can also provide exporters with pricing protection, as they can lock up their profits directly in RMB and lower the risks associated with receiving FX.
The RMB’s road to being selected has been anything but smooth. Last year, after the announcement was made that it was being reviewed, the country devalued its currency, which some took as a sign China was near to getting the currency to float freely.
Shortly after the devaluation, the country began a series of initiatives to boost the currency. In October of 2015, the People’s Bank of China announced the launch of China’s own payment system for cross-border yuan transactions called the China International Payment System (CIPS). The payment system was to provide yuan clearing and settlement services.
The second initiative was seen as more subtle but had a more explicit aim of satisfying the IMF and the SDR decision makers. Here China started conforming to the organization’s Special Data Dissemination Standards (SDDS). SDDS is a statistical system that will improve transparency. This move adopted the IMF’s best practices and was meant to show that China is being a “good citizen” by adopting the highest standards or IMF practices.
According to SWIFT, the RMB currently is the fifth most-active currency for global payments after spending some time at number four and represents 1.86% of global payments by value.
“The Executive Board’s decision to include the renminbi in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system,” said IMF Managing Director Christine Lagarde.