Time to include Renminbi in SDR basket?

By Yimian Wu

Financial experts from Hong Kong said in Chicago Wednesday that November will be a good time to include the renminbi, or RMB,  the Chinese currency, in the International Monetary Fund’s special drawing rights basket.

The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. The IMF reviews its SDR basket every five years and the next review will be in November.

In its 2000 review, the IMF did not include the RMB in its SDR basket because it was not “freely usable.” However, in a press release last March, IMF Managing Director Christine Lagarde said she was “impressed by the rapid internationalization of Renminbi in recent years” and the IMF welcomes and shares the Chinese government’s objective to have the RMB included in the SDR basket.

At a McCormick Place event to promote business in Hong Kong (which uses its own Hong Kong dollar, not the RMB), Benjamin Hung, regional CEO at Standard Chartered Bank, said there are around 60 central banks and sovereign wealth funds already invested in the RMB, with the aggregate amount exceeding $100 billion. “If it’s accepted to the SDR, that $100 billion will grow substantially,” he said.

Weber Lo, CEO of Citibank Hong Kong, said he thinks the RMB fits the IMF’s two main criteria, the country’s share of global exports and “freely usable currency.” He emphasized that “freely usable” is “not exactly freely convertible.”

SDR currency is different from reserve currency, said Laura Cha, chairman  of the Financial Services Development Council in Hong Kong. She said SDR currency is the currency that goes into the basket that can be used for payment. But she said the day when the RMB will replace the U.S. dollar as the world’s reserve currency is “quite far away.”

“U.S. dollar will remain the preeminent reserve currency but that doesn’t mean the world cannot have more reserve currency,” said Hung. He said there is room for China’s capital market to open up.

Hung said its valuation will not change significantly if the RMB is accepted as a SDR currency. He said that outside China, the value  of the RMB is entirely determined by the market because of the huge volumes in the market.

“To the extent that it is SDR-accepted, and to the extent that more people, more sovereign wealth funds and more central banks want to convert its currency to RMB, yes, there will be more buys,” he said.

The IMF announced in May  that the RMB is fairly valued, countering the prevalent criticism that the government keeps the currency undervalued.

Cha said the RMB is now the fifth most used currency in the world. However, she said the share of RMB is “a fraction” of the U.S. dollar. “U.S. dollar accounts for about 45 percent of the entire payment system in the global market and RMB ’til this stage is only 3 to 4 percent,” she said.

Currently, IMF’s SDR basket comprises  41.9 percent the U.S. dollar, 37.4 percent the euro, 11.3 percent the pound sterling and 9.4 percent the Japanese yen, according to the IMF.

Photo at top: Laura Cha, chairman of Hong Kong’s Financial Services Development Council; Benjamin Hung, regional CEO at Standard Chartered Bank Hong Kong,; Weber Lo, Citi country officer at Citibank Hong Kong; and Ding Chen of Think Asia, Think Hong Kong. (Yimian Wu/Medill)