What is the significance of the IMF raising the weight of RMB SDR？

Source: International Business Daily

　　Five years have passed since the RMB joined the Special Drawing Rights (SDR) currency basket of the International Monetary Fund (IMF) on October 1, 2016. According to the IMF’s practice, the weights of various basket currencies need to be re-examined. A few days ago, the IMF announced the updated weight distribution, and the new weight will take effect on August 1. According to the new weight distribution, the order of the five currencies has not changed, namely, US dollar (43.38%), Euro (29.31%), RMB (12.28%), Japanese yen (7.59%) and British pound (7.44%). Among them, the weight of the US dollar and the RMB increased by 1.65 and 1.36 percentage points respectively, while the euro, the Japanese yen and the British pound decreased by 1.62, 0.74 and 0.65 percentage points respectively. So, what does this adjustment mean? Why should the IMF adjust it?

　　SDR is an international reserve asset created by IMF under the Bretton Woods fixed exchange rate system after World War II, which is allocated to its member countries. Although the total amount of SDR is limited so far, its role is still very important. As a supplementary reserve, SDR can play the basic payment function of money between IMF members and IMF designated holders. Since SDR cannot be held by private enterprises or individuals, only 15 organizations are designated holders at present. Up to now, with the approval of 85% members of the IMF Board of Directors, the IMF has allocated SDR to all parties in a common way five times according to the share of member countries, namely, 1970-72 (9.3 billion), 1979-81 (12.1 billion), 2009 (161.2 billion) and 2021 (456.5 billion). In 2009, members who joined after 1981, which exceeded one fifth of the IMF members, never received SDR, and a special allocation of 21.5 billion SDR was made in response to the impact of the global financial crisis. The allocation in 2021 is the IMF’s action to support countries with insufficient liquidity to tide over difficulties and enhance the resilience of economic development under the epidemic of COVID-19. It can be seen that, similar to the currencies issued by various countries, SDR also undertakes the function of international reserves, but its total scale and growth rate are much smaller than those of most currencies. Up to now, all SDR allocated by the IMF is only about 878.4 billion US dollars if calculated according to the exchange rate on May 13, 2022.Even considering the interest required to use SDR, the global SDR is still limited, which should not exceed the GDP of the Netherlands in 2021. In addition, the interest rate of SDR (SDRi) is also an important reference index. According to the weighted average of the representative interest rates of short-term government debt instruments in the money market of SDR basket currency, it is a measure of the cost of capital use for the IMF to provide non-preferential SDR loans to its members. The five representative interest rates are the market interest rate of 3-month US dollar bonds, the spot interest rate of 3-month euro zone member governments rated AA or above issued by the European Central Bank, the market interest rate of 3-month Japanese discounted bonds, the market interest rate of 3-month British bonds and the benchmark interest rate of 3-month China treasury bonds.

　　From the initial fixed exchange rate with gold to the present, the method of determining SDR value has been developing continuously. In 1980, the SDR basket contained 16 currencies. At that time, the idea was that the more kinds of currencies in the basket, the more it could reflect the global transactions; The less the number, the lower the possibility of currency composition and ranking changes, the easier it is to form a stable structure, and the more it can reduce the cost and complexity of using SDR. In 2011, the IMF changed its view that with the change of SDR, the cost consideration of using SDR should be more important, so it chose to use fewer types of currencies. In 2016, the IMF added RMB to the basket, which not only recognized the RMB as a freely usable currency, but also reduced the stability risk of the currency basket. The global export share of Japan and Britain is close, and the change of ranking has limited impact on international trade. Adding RMB to the basket will make SDR’s basket currency account for a larger proportion in international trade, while the administrative cost of adding another currency is limited and affordable. SDR has worked well for five years. Then, what is the basis for adjusting the weight of basket currencies in this review?

　　Since SDR basket appeared, it is an important issue to determine its weight. In 1978, the calculation method of basket currency weight was determined to examine the exports of currency issuing countries in the first five years, and add up the amounts of various currencies held by other countries’ reserves to get the weights of each item. Since 1985, the IMF has considered the development of the private financial sector based on many factors such as international finance, exports and reserves. Moreover, after the euro joined the currency basket, the relative proportions of trade and financial variables have changed a lot. Exports are measured according to the total amount, while the flow of financial accounts is measured according to the net value. Before the outbreak of the global financial crisis, the scales of the two indicators were roughly the same, but the transaction scale of the foreign exchange market changed significantly faster than that of trade, which made it possible that the real trade demand was concealed by the financial indicators in the calculation of the currency basket weight according to the original method and could not meet the original goal of SDR. To this end, the IMF chooses to give equal weight to exports and financial variables (foreign exchange reserves) to measure the global use of various basket currencies.

　　In 2016, China exported 2.10 trillion US dollars and the United States exported 1.45 trillion US dollars; In 2021, China exported 3.36 trillion US dollars, and the United States exported 1.75 trillion US dollars. If only this ratio is calculated, the export ratio between China and the United States will be 1.92 in 2021 and 1.45 in 2016, and the weight of RMB in SDR basket should increase more than that of US dollar. But in fact, although the weight of RMB increased by 1.36 percentage points, the growth rate was 0.29 percentage points lower than that of the US dollar, indicating that the proportion of RMB in the reserve currency of IMF members has declined compared with that of the US dollar in the past five years. On the comprehensive consideration of trade and reserves, it seems that the financial attribute of RMB needs to be further strengthened.

　　Although different from the more accurate data that can be provided by the customs in trade statistics, the foreign exchange reserves of each member are based on the data provided by the IMF’s official foreign exchange reserve currency composition (COFER) survey, and there may be some deviations, the weaknesses of RMB can still be found from it. Although China’s export performance is outstanding, and its share in the global market continues to increase, its attractiveness and influence at the financial level are quite insufficient, and its trade advantage has not been transformed into financial advantage. In the past five years, SDR has included RMB in the currency basket, which has not produced the expected effect of increasing RMB in foreign exchange reserves. The confidence of foreign governments in the value of RMB may still be insufficient because of the underdeveloped market of related products and doubts about the opening up of foreign exchange management. In order to continue to increase the weight of the RMB in the next review before the end of July 2027, I am afraid that more efforts should be made at the financial level.

　　The writer is a researcher at the Research Institute of the Ministry of Commerce.