Mossack Fonseca China on IMF Admits

Chinese Renminbi to SDR Basket

(Mossack Fonseca) - On November 30, 2015, the International Monetary Fund (IMF)
admitted Chinas renminbi (RMB), also known as the Yuan, into the Special Drawing
Rights (SDR) basket of currencies. Effective October 1, 2016 the RMB will be a freely
usable currency and will be included in the SDR basket as a fifth currency, along with
the U.S. dollar, the euro, the Japanese yen and the British pound. Launching the new
SDR basket on October 1, 2016 will provide sufficient lead time for the Fund, its
members and other SDR users to adjust to the change, according to an IMF press
release.
The following weights have been established for each of the five currencies in the new
SDR basket that will take effect on October 1, 2016:
U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
Chinese renminbi 10.92 percent
Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)
The Role of the SDR
The SDR was created by the IMF in 1969 as a supplementary international reserve asset,
in the context of the Bretton Woods fixed exchange rate system. The SDR is neither a
currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable
currencies of IMF members. Holders of SDRs can obtain these currencies in exchange
for their SDRs in two ways: first, through the arrangement of voluntary exchanges
between members; and second, by the IMF designating members with strong external
positions to purchase SDRs from members with weak external positions. In addition to
its role as a supplementary reserve asset, the SDR serves as the unit of account of the
IMF and some other international organizations.
The SDR interest rate provides the basis for calculating the interest charged to
borrowing members, and the interest paid to members for the use of their resources for
regular (non-concessional) IMF loans. It is also the interest paid to members on their
SDR holdings and charged on their SDR allocation. The SDR interest rate is determined
weekly and is based on a weighted average of representative interest rates on short-term
debt instruments in the money markets of the SDR basket currencies.
Why the IMF Added the Renminbi
China is the second largest economy after the United States and is first in world trade.
The renminbi is the No. 4 currency for global trade, accounting for about 2.5 percent of
the total, according to SWIFT, the organization for interbank financial transfers. Beijing

controls the flow of money into and out of its economy but has encouraged the use of the
renminbi abroad, especially for trade, which helps Chinese exporters by eliminating the
cost and risk of volatile exchange rates. Since 2009, China has signed currency swap
agreements with central banks in Britain, Brazil, Canada, Indonesia, South Korea and
other countries. Branches of Chinese state-owned banks in Britain, Australia, Germany,
Switzerland, Russia, France and Singapore have received authorization to take deposits
or settle trade-related transactions in renminbi.
Impact on Global Finance
The SDR has no direct link to financial markets or private business. Over time, the IMF
decision might prompt central banks to hold more reserves in renminbi. JP Morgan
economist Haibin Zhu said renminbi holdings might rise to 5 percent of global reserves,
or about $350 billion, over five years. That might encourage more use of renminbi for
trade and investment. "Longer term, this is a huge step", said Stephen Innes, chief
trader for the currency firm OANDA in Singapore. "Once investors become more
comfortable with Chinese markets, especially if they continue to progress with opening
policies and make the same strides they did over the past year, international markets
will really embrace Chinese capital markets".
Impact on China
Economists say the IMF decision could encourage Chinese leaders to further relax
controls on the renminbi. The ruling Communist Party's latest five-year development
plan says the renminbi will be "freely tradable and freely usable" by 2020. The surprise
August introduction of a new mechanism for setting the government-controlled
exchange rate led to 3.5 percent devaluation. However, the country's top economic
official, Premier Li Keqiang, said in September that there were no plans for further
declines. Some traders worry Beijing might devalue once it achieved its goal of being
added to the IMF basket. But others say Chinese leaders want to be seen as reliable. The
renminbi's addition is "an endorsement as an international currency", said Chen Kang,
chief bond analyst for SWS Research Co. in Shanghai. "That will encourage China to
adopt more measures toward accelerating the process of the opening of its foreign
exchange markets and capital markets".
Unintended Consequences
The renminbi's government-set exchange rate still follows the dollar despite the new
mechanism for setting its value. For now, that makes the renminbi a dollar in disguise,
according to Derek Scissors of the American Enterprise Institute in Washington. Until
the renminbi is allowed to trade freely, the IMF decision will "increase the dollar's
importance", said Scissors. "Those governments or investors hoping for a dilution of
dollar dominance for portfolio diversification or political reasons are getting exactly the
opposite".