The IMF’s Special Drawing Right and China’s Renminbi

The IMF’s Special Drawing Right and China’s Renminbi

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Updated June 28, 2016
The IMF’s Special Drawing Right and China’s Renminbi
Overview
five-year period and were determined by the IMF to be
During 2015, The International Monetary Fund (IMF)
“freely usable.”
reviewed the basket of currencies used to determine the
value of the Special Drawing Right (SDR), the international
The value of the SDR is currently equal to a weighted
reserve asset created and used by the IMF. Following a
basket of four currencies (U.S. dollar; euro; Japanese yen;
recommendation by IMF staff, the IMF Executive Board
British pound sterling). The SDR basket is revaluated every
decided on November 30, 2015 to include the Chinese
five years. Currently, one SDR is equivalent to around
RMB in the SDR basket as a fifth currency, alongside the
$1.42. In its 2015 review, the IMF assigned a 10.92%
U.S. dollar, euro, British pound, and Japanese yen. The
weight to the RMB in the new SDR basket, which will go
decision will be effective on October 1, 2016.
into effect on October 1, 2016 (Figure 2). The next review
of the SDR basket is to be completed by September 30,
What is the SDR?
2021.
The SDR is an international reserve asset comprised of a
basket of major currencies. Created by the IMF in 1969,
Figure 1. Composition of the SDR Basket
SDRs are allocated to IMF members to supplement their
existing official reserves. In addition to its role as an
international reserve asset, the SDR serves as the unit of
account for the IMF and a number of other international
organizations. Member country contributions to the IMF, as
well as IMF financial assistance to member countries, are
valued in SDRs.
All 189 IMF member countries, the IMF itself, and various
international organizations utilize SDRs. Although not an
international currency in and of itself, SDRs can be
exchanged for hard currency and can be used in
international transactions by central banks and other
monetary authorities. Private sector holding of SDRs is
prohibited.
IMF members receive interest on their SDR holdings and

pay charges on their cumulative allocations of SDRs at the
Source: International Monetary Fund
same interest rate. The SDR interest rate is a weighted
average of 3-month sovereign bill rates of these currencies.
The 2015 SDR review consisted of two components: (1) a
technical review by IMF staff to determine whether the
SDRs represent a small percentage of global foreign
RMB meets the SDR criteria; and (2) a vote by the IMF
reserves. Total currency reserves were $10.94 trillion at the
Executive Board. Decisions to change the valuation method
end of December 2015, according to most recent IMF
are based on a 70% majority vote. Thus, the United States
figures. Of the countries that report the currency
with 16.74% of the total voting power could not prevent the
composition of their foreign exchange reserves (allocated
RMB’s inclusion in the SDR basket (if it so chose) without
reserves), the U.S. dollar accounts for 64.1% percent of the
the support of other IMF members.
total. By contrast, there are currently around SDR 204.1
billion outstanding (around $289 billion dollars). Thus,
Export Criterion: The level of a country’s exports
SDRs comprise 2.6% of total foreign exchange reserves,
provides an initial test of its currency’s potential for
equivalent to the percentage of global foreign exchange
inclusion in the SDR basket. This criterion ensures that the
reserves held in the Canadian dollar and the Australian
SDR basket comprises currencies that play a central role in
dollar. Since their creation in 1969, the total amount of
the global economy.
SDRs has not exceeded 7% of total foreign exchange
reserves.
Freely Usable Criterion: In addition to meeting the export
SDR Valuation and Review
criterion, a country’s currency must be “freely usable,”
meaning that it is widely used to make payments for
In 2000, the IMF Executive Board adapted criteria for
international transactions, and is widely traded in principal
determining the SDR basket of currencies. It included four
exchange markets. According to the IMF, the concept of a
currencies issued by members or currency unions whose
freely usable currency concerns the actual international use
exports of goods and services had the largest value over a
and trading of currencies, and is different from whether a
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The IMF’s Special Drawing Right and China’s Renminbi
currency is either freely floating or fully convertible. Thus,
rise since 2013 in the RMB’s share of transaction volume.
a currency can be widely used and widely traded even if it
During March 2016 (the most recent month for which data
is subject to capital account restrictions. Conversely, a
is available), the RMB was the 4th most frequent currency
freely floating and fully convertible currency may not
used for international transactions (Figure 2).
necessarily be freely usable.
Figure 2. Top Five Global Payment Currencies
The decision of whether a currency is freely usable is
Percentage of Global Payments, March 2016
informed by the level of official reserves denominated in
that currency, as well as consideration of other indicators of
the breadth and depth of the currency’s use and trading in
global financial markets. These include the currency
denomination of international debt securities, international
banking liabilities as indicators for assessing wide use, and
the volume (turnover) of transaction in foreign exchange
markets. However, the indicators are not applied
mechanistically and the freely usable determination
ultimately requires judgment by the IMF Executive Board.

China and SDRs
Source: SWIFT
The third largest exporter behind the United States and the
Since 2009, China has implemented policy measures to
Euro area, China, meets the export criterion for inclusion in
internationalize the RMB. These reforms address three
the SDR basket. China’s share of global exports of services
main areas: gradual opening of the capital account for
was 11% over the 2010-14 period, over double that of
foreign private and official investors, steps to strengthen the
Japan (5%) and the United Kingdom (4.9%). Turning to the
domestic financial system, and offshore liquidity support
freely usable criterion, despite achieving full current
through improvements to cross-border payments
account convertibility in the late 1990s, China still
infrastructure and central bank swap lines.
maintains capital account controls, which has hindered its
international usage.
U.S. Policy and Implications
In September 2015, the Obama Administration released a
According to the IMF, failure to meet the “freely usable”
statement saying that the United States supports the
criterion prevented the RMB from inclusion in the SDR
inclusion of the RMB in the SDR basket “provided the
basket in 2010. Chinese authorities’ recent efforts for
currency meets the IMF’s existing criteria in its SDR
gradual opening of the capital account are among the key
review.” Similar statements have been made by other
areas of consideration by IMF staff and member countries.
European and Asian officials. Including the RMB in the
A general consensus among economists is that the RMB is
a “mixed
SDR basket is symbolically important to China. It signals
-bag,” meeting some but not all the criteria to be
considered “freely usable.”
that the IMF believes that the RMB possesses the necessary

attributes to become an international reserve currency.
The “freely usable” criterion comprises two key tests:
At the same time, a decision by the IMF to include the
whether a currency is widely used for international
RMB in the SDR basket does not grant reserve currency
transactions and whether it is widely traded on international
status to the RMB or directly increase demand for renminbi
financial markets. Regarding the first criteria, figures
assets from central banks and international investors. The
provided by The Society for Worldwide Interbank Financial
decision of whether or not to hold RMB and RMB-
Telecommunication (SWIFT) show that the RMB is among
denominated assets will be made after individual
the five most widely used currencies for international
assessments of the depth and liquidity of Chinese financial
payments (Figure 2) and is the second most widely used
markets by central banks and financial market participants.
currency for letters of credit.
It is less clear whether the RMB can be considered “widely
Of potential broader interest to policymakers and analysts is
traded.” The IMF’s main indicator for determining whether
whether the inclusion of the RMB in the SDR basket
reflects a shift in global attitudes on the necessary attributes
or not a currency is widely traded is transaction volume
of an international reserve currency. Including the RMB in
involving the exchange of that currency. According to
the SDR basket affirms that a currency can be an
figures compiled by the Bank for International Settlements
international reserve asset without being fully convertible.
(BIS), the four current SDR currencies (dollar, euro, pound,
Although China has made substantial progress in opening
yen) account for roughly 80% of total turnover.
its capital markets and financial sectors to investments,
internationalization along these measures stop well short of
While overall levels of RMB turnover remain modest, BIS
data (available through 2013) shows that the RMB’s share
a fully open capital account.
of total turnover has increased. The RMB’s total share
increased to 1.1% (daily average turnover of $120 billion),
Martin A. Weiss, Specialist in International Trade and
up from 0.4% (34 billion in 2010). More recent
Finance
information, including regional and national surveys, as
IF10327
well as transaction data from SWIFT suggests a continued
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The IMF’s Special Drawing Right and China’s Renminbi

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https://crsreports.congress.gov | IF10327 · VERSION 4 · UPDATED