E-mail:    

Currency Analysis

RMB

Consequences of the IMF’s Decision to Include the Yuan in the SDR Basket

RMB, Consequences, IMF, decision to include, Yuan, SDR basket, Currency Analysis, fx trader, forex

1 Feb 2016

The SDR, Special Drawing Rights, or often called IMF’s currency, is not in fact a currency, but a IMF’s unit of account. It plays a marginal role in the global financial system, where it technically constitutes an international reserve asset that helps maintain the balance between countries with big external liabilities and those flushed with cash. The value of an SDR is defined as the value of a fixed amount of Yen, Dollars, Pounds or Euros - and from Oct 2016 also of Yuan – and is expressed in dollars at the current exchange rate. This basket of currencies is altered every 5 years to reflect the importance of different currencies in the world’s trading system.

SDRs nevertheless represent a potential claim on the non-gold foreign exchange reserves of IMF member countries, which can be exchanged for freely usable currencies. IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves.

Consequences for the RMB

On Monday 30th November 2015, the IMF voted to include China’s currency into the basket of currencies which compose the SDR. This proved as a victory for China as it confers a de facto reserve status to the currency, since the SDR only consisted of 4 major currencies from the 1990s as mentioned earlier. The new SDR basket will be launched on Oct 1st 2016, and the Yuan will have 10.92% weight in the basket, US Dollars 41.73%, Euro 30.93%, British Pound 8.09%, and Japanese Yen 8.33%.

RMB, Consequences, IMF, decision to include, Yuan, SDR basket, Currency Analysis, fx trader, forex SDR Basket Composition

Figure 1. SDR Basket Composition                       Sourse: International Monetary Fund

Next>>