China's Entry into SDR
CEIC Gallery/Emerging Economies/China Premium Database (Also applied: WorldTrend Database, Global Database & Daily Database) - February 15, 2016 Summary On 30 Nov 2015, IMF announced to include RMB in its SDR currencies basket from 1 Oct 2016 as the fifth reserve currency, with a weighting of 10.92%. It implies China is stepping forward on RMB internationalization. This may benefit China in four ways: 1) Encourage more international trading transactions and investments to be settled in RMB 2) Drive some central banks or funds to increase their RMB reserves, although it would happen at a slow pace 3) Lower Chinese companies’ overseas financing costs, which can assist the implementation of “One Belt One Road” 4) Drive China to enhance and internationalize its financial mechanisms In fact, joining SDR basket is just part of RMB internationalization tactics. Its impact may not be seen instantly. However, we can monitor China’s Exchange Rate, Interest Rate, M2 Money Supply, FDI and ODI, as a reference for its impact on China. In addition, we can consider the impact of joining SDR on Eurozone, which had currencies established and joined SDR in 1999. Again, its indicators are a good reference. Chart 1 - 2
- Chart 1 shows SDR’s current fund position, which is 204,180 million SDR unit, approximately USD 285 billion. USD, EUR, JPY and GBP account for 41.9%, 37.4%, 9.4% and 11.3% respectively. Starting from 1 Oct 2016, RMB will join SDR with a weighting of 10.92%. The weighting of USD, EUR, JPY and GBP will be adjusted to 41.73%, 30.93%, 8.33% and 8.09% respectively.
- Chart 2 shows the total amount of foreign exchange reserves in the world, as well as the corresponding year-on-year growth rate. The proportion of RMB in SDR and that in the global FX reserve are different.
- Being acknowledged as an international currency would lead to higher demand and lower interest rate, although it is not the only factor that affects a currency’s demand and interest rate.
- Chart 3.1 and Chart 4.1 show RMB’s per USD exchange rate and interest rate respectively.
- EUR’s per USD exchange rate and interest rate are shown in Chart 3.2 and Chart 4.2 respectively for reference.
- Entering SDR would encourage adoption and hence increase demand for offshore RMB. It would result in higher offshore RMB exchange rate and currency outflow from onshore to offshore.
- Chart 5.1 shows the onshore and offshore RMB/USD exchange rate, which can be a reference of demand for onshore and offshore RMB.
- Chart 5.2 and 5.3 show the RMB Money Supply and EUR Money Supply respectively for reference.
- As mentioned in the summary, RMB being internationalized can help to lower Chinese companies’ overseas financing costs, which encourages the growth of China’s outward direct investment (ODI).
- Chart 6.1 below shows China’s foreign direct investment (FDI) and outward direct investment (ODI).
- Chart 6.2 shows Eurozone’s foreign direct investment (FDI) and outward direct investment (ODI) for your reference.
- RMB entering SDR is expected to encourage more international trading transactions and investments to be settled in RMB.
- Chart 7.1 to Chart 7.4 show the amount of Cross-border RMB Settlement by different categories.
- Chart 8 shows the ratio of foreign exchange settlement by banks in China to banks’ foreign related receipt on behalf of their clients. It shows bank clients’ willingness to settle their foreign exchange transactions in RMB.
- For further details regarding Chart 8, please refer to CEIC China Data Talk released on 28 Oct 2015.