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RMB appears likely to join ‘International Currency Basket’

Editor: Tong Xinxin 丨CCTV.com

10-30-2015 11:43 BJT

By Zhang Monan, Associate Researcher, China Center for International Economic Exchanges

Recently, International Monetary Fund (IMF) representatives disclosed China’s currency, the RMB may soon join the SDR (Special Drawing Rights).

More countries will use the RMB or include it in their foreign currency reserve assets that can boost the internationalization of the RMB as a realization of Beijing’s financial opening up strategy.

In 1944, representatives of major Western countries established the Bretton Woods System at the United Nations Monetary Financial Conference. It is an international monetary system with US dollars as its centerpiece, ever since World War II.

Due to frequent occurrences of a dollar crisis and the US economic crisis, as well as the entangling contradictions of the system itself, it had come to an end in 1973.

In 1969, at the beginning of the exposure of Bretton Woods System defects, the IMF created the SDR to mitigate the risks of the sovereign currency as a reserve currency, and set the tone for international monetary system reforms.

The IMF assesses the SDR every five years. In accordance with the standards, the composition of the SDR basket currencies must satisfy two conditions: First, the currency basket must be a participator of the IMF or currency issued by the Monetary Union.

Within the first five years’ test period before the year when the basket takes effect, the economy is one of the four largest merchandise and service trade exporters, which meets the standards of “major trading countries”. Second is the “free for use” standard.

The currency is widely-used for international payment transactions and widely-traded in the principal exchange markets. This is the "freely usable currency” stipulated in article f, paragraph 30 of Monetary Fund Agreement.

As to the first condition, China would have qualified, since it’s the world’s largest exporter of goods and the fifth largest services exporter, which made it the world’s third largest exporter of goods and services, right after the European Union and the United States (Euros and Dollars).

The core problem lies in the second criterion, that is, the accession of freely usable criteria in meeting IMF requirements, which is the extent of widely-used in international payments and widely-traded in major foreign exchange markets. The currency is approaching the standard.

Society for the Worldwide Interbank Financial Telecommunication (SWIFT) data shows that the RMB is currently the world’s second-largest trade funding currency.

In the global payments market, the RMB market share, from 0.84 per cent in August 2012 to 2.79 per cent in August 2015, for the first time it became the world’s fourth largest payment currency.

The cross-border trade settlement and savings are growing rapidly. According to Central Bank statistics, the People’s Bank of China has 32 national and regional monetary authorities that have signed a currency swap agreement, totaling 3.1 trillion yuan.

Cross-border RMB indices issued by the Bank of China reported that the actual cross-border RMB receipts and payments of the European and the mainland China is increasing rapidly.

Since 2014, China has signed the RMB Clearance Agreement with the United Kingdom, Germany, Luxembourg, France and Switzerland. A Europe-wide RMB currency swap network is emerging.

Promoting Chinese financial reform and opening up, the RMB internationalization, free floating exchange rate, and interest rate and the RMB capital account convertibility are “four in one”, and they complement each other.

The formation mechanism of the RMB exchange rate is the key element that hinders the Chinese capital account liberalization, RMB internationalization and strengthening monetary autonomy.

The main obstacle of RMB accessing to the SDR currency basket is still the convertibility of capital, which can eliminate the barriers of RMB entering SDR, and help to eliminate the feed prices of some countries with regard to capital account convertibility.

The capital account liberalization has become important key variables that can decide if the RMB enters SDR or not.

After the 2008 international financial crisis, China has promoted capital account liberalization and trade investment facilitations; expanding imports of advanced technology and key equipment, necessary resources and raw materials.

On the premise of risk control, gradually realizing RMB capital account convertibility, supporting qualified enterprises to expand international mergers of low risks and stable proceeds by taking opportunities of foreign asset prices sharp falls, and to relax the restrictions on domestic institutions and individual overseas securities investments.

China has made great efforts to upgrade the financial risk control mechanism and macro-prudential regulatory frame work, paving the way for RMB entering the currency basket.

According to Standard Chartered Bank estimates, if RMB accesses to the SDR, at least US$1 trillion of international reserves will be transferred to a storage in RMB in the future world, which would reflect changes of the world economy.

Meanwhile, RMB’s involvement in the SDR currency basket would enhance the global representation and dynamics of the basket, and would play an important role to stabilize the world’s financial conditions.

To Beijing itself, getting included in the SDR is not the ultimate goal. Taking the opportunity to access the SDR is a forced process of internal reforms, and it is also a new catalyst for succeeding as a financial power in the process of opening-up.

 

( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )

 

 

Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.


 

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