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Inclusion of the renminbi may spur wider use of IMF currency unit

David Marsh says Beijing is likely to set up an SDR borrowing platform as early as this summer, in advance of the renminbi’s formal entry into the IMF’s composite currency

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Chinese banknotes are seen in a vendor's cash box at a market in Beijing. China’s renminbi is closer to joining the major league of reserve currencies with a deal to include it in the International Monetary Fund's unit of account. Photo: Reuters

China appears likely to speed up promotion of the International Monetary Fund’s special drawing right under a plan to establish a platform this summer for SDR borrowing by Chinese and foreign entities on its onshore capital market.

The initiative will help fulfil several strategic Beijing monetary and economic objectives. These include boosting international acceptance of the renminbi, which enters the IMF’s composite currency unit in October with a weighting of around 10.9 per cent, joining the dollar (41.7 per cent), euro (30.9 per cent), yen (8.3 per cent) and sterling (8.1 per cent) as officially recognised reserve currencies.

Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, helping dampen capital outflows that have gained prominence in the last 18 months as a result of progressive liberalisation of capital controls.

UN Secretary General Ban Ki-moon gives a speech at the 2015 IMF/World Bank spring meetings in Washington. Photo: EPA
UN Secretary General Ban Ki-moon gives a speech at the 2015 IMF/World Bank spring meetings in Washington. Photo: EPA

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The SDR borrowing platform seems likely to be set up as early as July, earlier than expected, and in advance of the currency’s formal SDR adherence. This will necessitate creating a synthetic SDR that can be related, through forward pricing, to the “new” SDR being created in October. This step will place pressure on the IMF to update its procedures for fixing the SDR, which at present is set daily, but in future may need to be established on a 24 hours a day basis.

China is open to extending further the number of currencies in the SDR basket

China is open to extending further the number of currencies in the SDR basket. It would favour, for example, the rupee joining in coming years in line with India’s decision to internationalise its currency – but only if driven by capital market requirements.

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