The International Monetary Fund (IMF) today completed a five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR) and decided that the Chinese currency (known as RMB, CHN and renminbi) met all existing criteria to be included in the basket. The IMF determined that, effective October 1, 2016, the Chinese currency is to be a freely usable currency that will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen, and the British pound.
The IMF believes that launching the new SDR basket on this date will provide sufficient lead time for the Fund, its members and other SDRT users to adjust to these changes – additionally, Beijing will need to implement a number of additional reforms. The Managing Director of the IMF, Christine Lagarde, stated: “The Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system.
It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
It should be noted that the inclusion of the RMB will be mainly at the expense of the euro rather than the dollar, allaying immediate concerns exhibited by US economists: before the change the basket was comprised of the following SDR composition: USD 41.9%, EUR 37.4%, GBP 11.3%, JPY 9.4%, while after the RMB’s inclusion the breakdown will be the following: USD 41.73%, EUR 30.93%, CNY 10.92%, JPY 8.33%, GBP 8.09%.
Showing the importance of the decision to traders worldwide, Darryl Hooker, Global Co-Head of EBS BrokerTec Markets, commented on the rapid rate of adoption for the Chinese currency that they experienced. Hooker said: “Today’s decision by the IMF is a key milestone in the internationalisation of the currency. The speed at which the renminbi has reached major currency status on the global stage has been unparalleled. On the EBS market platform, USD/CNH is now a top 3 currency pair, up from top 15 in 2013. Average daily volumes in 2015 are double those executed in 2014, with counterparties from over 20 countries active every day. The SDR’s recognition of the renminbi as a reserve currency should only encourage this growth trend to continue.”
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Wall Street Big Guns Push for RMB Trading in the U.S
In addition to the IMF’s decision today, a group of “senior leaders in finance and U.S industry” announced the formation of The Working Group on U.S. RMB Trading and Clearing, which will push to establish the trading and clearing of the Chinese currency in the United States.
Billionaire and former New York City Mayor Michael Bloomberg will serve as Chair of the group and former Securities and Exchange Commission Chairperson Mary Schapiro will serve as Vice-Chair. Co-Chairs will be the President and CEO of the United States Chamber of Commerce Thomas Donohue, the 75th U.S Treasury Secretary Timothy Geithner and the 74th U.S Treasury Secretary and ex-Goldman Sachs CEO Henry Paulson.
In addition to this impressive leadership, the group will initially include the following American institutions: The U.S Chamber of Commerce; Bank of America; BNY Mellon; Citi; Goldman Sachs; JP Morgan Chase; Morgan Stanley; and Wells Fargo. The initial Chinese institutions are: Agricultural Bank of China; Bank of China; Bank of Communications; China Construction Bank and Industrial and Commercial Bank of China. Additional firms are expected to join the group in the near future.
“An enhanced RMB market in the U.S. will allow for a more efficient means for converting U.S. dollars to RMB, which helps American companies save on transaction costs and facilitate further trade with China,” said Mr. Paulson. “In turn, these benefits will make American exports more attractive for Chinese consumers and companies that prefer to pay in the local currency, boosting American manufacturing and competitiveness.”
Mr. Tian Guoli, Bank of China’s Chairman of the Board of Directors said, “We are pleased to join the working group as an initial member, and work with business leaders from China and the U.S. to advance a mechanism to trade and clear renminbi in the U.S. Against the backdrop of enhanced bilateral ties, Bank of China hopes to play a more active role in promoting renminbi in the U.S., and bridge financial and trade exchange for mutual benefits and development.”