The International Monetary Fund (IMF)'s executive board on Monday approved the inclusion of China's currency renminbi (RMB) in its Special Drawing Rights (SDR) basket as an international reserve currency. Here is the Q&A on this year's SDR review published on the IMF website.
Q1: What is the SDR?
The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves. Its value is currently based on a basket of four major currencies (U.S. dollar, euro, Japanese yen, and British pound). The basket will be expanded to include the RMB as the fifth currency, starting on Oct. 1, 2016 once the new basket of currencies takes effect.
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.
Q2: What are the criteria for SDR basket inclusion?
The current criteria for inclusion were adopted by the IMF's Executive Board in 2000. They established that the SDR basket comprises the four (expanded to five, effective Oct. 1, 2016) currencies that are issued by members or monetary unions whose exports had the largest value over a five-year period, and have been determined by the IMF to be "freely usable".
The export criterion, which acts as a "gateway," aims to ensure that currencies that qualify for the basket are those issued by members or monetary unions that play a central role in the global economy.
The requirement for currencies in the SDR basket to also be freely usable was incorporated in 2000 to allow the currency selection criteria to formally reflect the importance of financial transactions.
Q3: What was the focus and outcome of the 2015 SDR review?
The IMF recently concluded the quinquennial review of the SDR currency basket. As China continues to meet the export criterion for SDR inclusion, the review focused on assessing whether the RMB could be determined to be a freely usable currency, which is the other criterion for inclusion in the basket. This criterion requires an Executive Board determination that the currency is, in fact, widely used to make payments for international transactions and widely traded in the principal exchange markets.
The Executive Board at its meeting on Nov. 30, 2015 decided that, effective Oct. 1, 2016, the Chinese renminbi is determined to be a freely usable currency and will be included in the SDR basket, as a fifth currency, along with the U.S. dollar, euro, Japanese yen and pound sterling.
