Reporter Journal / William Hennelly

RMB to IMF's SDR? More than just alphabet soup for China

By William Hennelly (China Daily USA) Updated: 2015-11-19 05:19

China is closer to getting a seat at the high-roller table in the currency casino, but the question arises of what the payoff will be.

"Joining the SDR (special drawing rights basket) is a sign of recognition of the incredible progress China achieved in opening up its markets and internationalizing the use of the yuan," currency expert Marc Chandler wrote in a note to clients that he made available to China Daily.

RMB to IMF's SDR? More than just alphabet soup for China

"The international goal has helped focus China's financial reform efforts, in a similar way that joining the World Trade Organization in 2001 facilitated earlier reforms," said Chandler, who is global head of markets strategy and foreign currency at Brown Brothers Harriman in New York.

"It is an unequivocal acknowledgement that China is among the great financial powers," said Chandler, who recently returned from an Asian trip that included a stop in China.

Christine Lagarde, managing director of the International Monetary Fund (IMF), which manages the SDR, on Monday reiterated her support for the fund's recommendation to include the yuan in the SDR. She pledged her support of the renminbi's inclusion in a statement issued Monday at the close of the two-day Group of 20 summit in Antalya, Turkey.

"I noted the IMF's upcoming review of the SDR and the fund's staff recommendation to include the Chinese renminbi in the SDR basket; I support this recommendation," she said.

The IMF board is scheduled to decide on the yuan's inclusion later this month. If approved, the yuan would join the dollar, euro, yen and pound in the SDR.

US Treasury Secretary Jack Lew has said he would support adding the yuan to the basket if it meets IMF criteria.

Chandler said that many accounts in the Western financial media misrepresented China's reset of the yuan in August as an attempt to prop up exports.

"The SDR is fixed every day. The participating central banks give the fix of their currency to the IMF," he explained. "The fix needs to be a market price. Before Aug 11, the fix was not a market price and had a seemingly little relationship with the spot market. The PBOC's measures were aimed at closing the gap between spot and the fix."

Chandler said China's currency moves were designed to increase the internationalization of the yuan and are understandable "only within the context of its push to join" the SDR.

"China is the world's largest exporter. It is the accessibility of the yuan that has been the stumbling block," he said. "However, over the past few years, China has improved the accessibility of the yuan."

As to the economic benefits of a depreciated currency, Chandler pointed to Japan.

"The dollar has appreciated by more than 50 percent against the yen over the last three years. What has happened to the volume of Japanese exports? Very little."

Chandler said the same was true for Canadian and Australian exports, which have seen significant currency declines without a corresponding rise in exports.

He also said that China is "gradually climbing the value-added chain in manufacturing, but yuan-incurred costs remain modest compared with other large economies".

"That means that China's exports will likely be considerably less sensitive to the yuan's fluctuations than Japan (is)," Chandler wrote. "The 3 percent to 4 percent depreciation of the yuan is unlikely to have a tangible impact on China's exports."

Chandler said the SDR currencies are assigned a weight based on trade and reserve status.

"Given China's export prowess, it suggests the yuan should be a major currency in the SDR," he said. "However, as a reserve asset, it is very small.

"The IMF estimates the yuan's share of reserves at a minuscule 1.1%," Chandler wrote. "Entry into the SDR is a sufficient victory for China that if it is assigned a low weight now, that would be acceptable. The SDR currency weightings are reviewed every five years, and continued evolution of the yuan may see it get increased weight in the future.

"The US dollar has the largest weight in the SDR, and yet the US pays a premium over nearly every eurozone country and Japan," he said. "The 'exorbitant privilege' that is often attributed to reserve currency may be exaggerated."

Chandler said that the yuan's inclusion in the SDR may be "an issue of status and prestige mostly".

"This is not a judgment," he said. "It is a description. It seems clear that there may be a tendency in China to feel mistreated at the hands of the US (and other high-income countries) and (that it) has not gotten the respect it believes it deserves."

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