CCTV News:On October 1st, Beijing time, Lagarde, President of the International Monetary Fund (IMF), announced that RMB had officially joined the Special Drawing Rights (SDR) currency basket, with a weight of 10.92%. The RMB has become the fifth "basket" currency after the US dollar, the euro, the Japanese yen and the British pound, and is the only emerging economy currency in the new SDR basket. It marks that RMB ranks among the international reserve currencies.
This is an important page in the process of RMB internationalization. IMF Managing Director Lagarde has said that this move is an important milestone in bringing China’s economy into the global financial system, and it is also an affirmation of China’s monetary and financial system reform in the past few years.
This is actually a "marriage" set at the end of last year.
On November 30, 2015, the IMF announced the inclusion of RMB in the SDR currency basket, but gave a 10-month preparation period. During the 10-month preparation period, the Bank of China and major financial institutions made various preparations for the offshore RMB, and the International Monetary Fund also set up a circulation platform and a new management structure for the RMB internationally.
Everything is ready, and the new SDR basket takes effect today (October 1).
RMB becomes the third largest currency of SDR.
After the RMB entered the basket, the proportion in the SDR basket was 10.92%, and the weight of the other four currencies decreased accordingly. The weight of RMB surpassed that of Japanese yen and British pound and became the third largest currency in SDR currency basket.
Many people may ask, SDR sounds so professional. Is it a currency? What is a "basket"? What does the inclusion of SDR mean for RMB? What benefits can we get from the government, enterprises and ordinary people?
What is SDR?
SDR is special drawing right, which is an international reserve asset created by the International Monetary Fund in 1969 to supplement the official reserves of member countries. Although it is an asset, it can’t find any SDR currency with face value. It is just a unit of account.
Although SDR itself is not money, it can be used as money.
As a reserve asset, it is held by all countries, and can also be used for bookkeeping, repayment and interest payment in all countries. The value of SDR is determined by the five currencies that have been included in this currency basket: USD, EUR, RMB, GBP and JPY. Once there is demand, member countries can convert SDR in their accounts into these five currencies and withdraw them. At present, the IMF has created a total of 204.1 billion SDR, equivalent to about 285.4 billion US dollars.
Still don’t understand? Xiaobian, let’s make an analogy again. Special Drawing Rights (SDR) is like a credit card that can be withdrawn from the IMF. Of course, there is no money on the card, just a line. When an IMF member is in financial difficulties and in a hurry to use money, it can apply to the IMF to swipe this "credit card" in exchange for a basket of currencies, and then the IMF will arrange for foreign exchange-rich member States to exchange it.
With the development of China’s economy to the world, RMB has been used in various occasions around the world. However, before that, the IMF basket had not been loaded with RMB, and the SDR card could not be swiped, which was obviously divorced from the development of the global economy. Starting today, countries that often use RMB in international payments can easily exchange SDR for RMB directly at the IMF.
Zhu Min reveals the secret: the thrilling moment before "entering the basket"
In 2015, Zhu Min, as the vice president of IMF, experienced the critical moment when RMB was included in SDR. Especially last summer, China’s stock market and foreign exchange market fluctuated violently, which put great pressure on whether RMB can successfully join SDR. In an exclusive interview with CCTV, Zhu Min revealed that thrilling moment.
Zhu Min, former vice president of the International Monetary Fund
"The International Monetary Fund just fryers. If the foreign exchange market and the stock market will be so volatile, will this currency be a stable currency? This pressure is enormous. " Zhu Min recalled.
At the critical moment, the People’s Bank of China, the Ministry of Finance and other departments made statements one after another, promising to maintain the stability of the RMB exchange rate and continue to unswervingly promote financial reform. Subsequently, the RMB exchange rate continued to fluctuate in a stable range and entered a relatively stable state. On November 30, 2015, the Executive Board of the International Monetary Fund unanimously approved the inclusion of RMB in the SDR currency basket.
On that day, Zhu Min was very happy. "We made a cake symbolizing SDR. We divide the pound, the yen, the dollar and the euro equally, but putting the RMB in it is particularly large, which shows the vitality of emerging currencies. Lagarde also kissed the automatic knife, and finally we ate this cake and ate it happily. "
What are the benefits of RMB joining SDR?
1. Enhance the international recognition of RMB.
IMF is the most important economic platform in the world today. If a country’s currency is included in the IMF’s currency basket, it will gain international recognition more quickly. This is a kind of certification and an identity, which means that the status of RMB as a reserve currency is officially recognized.
2. Increase the speed of RMB internationalization.
After RMB joins SDR, the world’s major central banks will reconfigure their foreign exchange reserves according to the composition of SDR currency basket. It is roughly estimated that this part of the capital flowing into RMB assets will exceed 10 billion US dollars. Member States can choose RMB to pay their shares to the IMF, or they can ask the IMF to allocate funds to them in RMB, and member States can also choose to repay in RMB. All these have increased the use of RMB and enhanced China’s competitiveness.
3. Accelerate China enterprises to "go global"
In the process of promoting the "Belt and Road" and AIIB projects in China, with the increasing use and acceptance of RMB labeled "SDR", the exchange rate risk and transaction cost in intra-regional trade and investment will be further reduced, thus escorting Chinese enterprises to "go global".
4. China’s financial market will be more open.
The RMB has been "among" the SDR basket, which means that the international community will look at China’s financial system reform and opening up with a higher standard and international monetary responsibility. Therefore, RMB’s entry into SDR will not happen once and for all. China needs to continue the process of reform and opening up, so as to make RMB a veritable SDR currency.
5. Contribute to global financial stability
After joining SDR, RMB will gradually develop into one of the major currencies in the world. In the future, there may be a "three-legged" situation of USD, EUR and RMB, which will help to promote the diversification of the international monetary system and improve its stability and resilience. At the same time, the entry of emerging market currencies into the SDR currency basket will help to improve the previous pattern of using only developed countries’ currencies as reserve currencies and enhance the representativeness and attractiveness of SDR itself. In addition, RMB’s participation in SDR will also help to improve the stability of SDR.
What impact does joining SDR have on ordinary people?
RMB’s entry into SDR is naturally good news for ordinary people, and it is very close to the lives of ordinary people.
Joining SDR will improve the credibility of RMB and its position in the global monetary system, which will make our RMB account better used in payment and consumption. There will be more organizations and individuals around the world willing to accept our UnionPay cards, even Alipay. However, if you want to spend RMB around the world casually, it may be just a concept. You must also swipe your card or change local currency to spend.
It is also good for investment. With the internationalization of RMB, it will be as convenient for us to invest in American and European stock markets and bond markets in the world as it is at home. If you can use RMB to finance overseas, it will be beneficial to the management of exchange rate risk. The liquidity of RMB will be enhanced, the related transaction cost of RMB will be reduced, and the financial cost of corresponding management will also be reduced, which has many benefits.
Some fallacies about RMB joining SDR
One of the fallacies: you don’t need to exchange money when you go abroad.
This is an absurdly wrong but the most widespread fallacy: "Traveling when you leave will no longer be a dream. Traveling and shopping abroad can be settled directly in RMB, and you don’t need to exchange foreign exchange, and you don’t have to worry about exchange rate costs and risks."
For example, the US dollar accounts for up to 41.73% of SDR. When Americans go to China, Japan and Australia, can they take taxis, eat and shop directly with US dollars without changing foreign exchange? Obviously not. How to use money in other sovereign countries is determined by sovereign countries and has nothing to do with joining SDR.
Myth 2: After joining SDR, the RMB will depreciate sharply.
Whether the RMB depreciates or not basically depends on the economic situation in China and has little to do with SDR. In fact, with the further increase of international investors’ demand for RMB bond assets, the corresponding capital inflow will help the RMB exchange rate to remain stable.
Myth 3: After joining SDR, RMB has finally become an international currency.
The inclusion of RMB in SDR is indeed worth celebrating and will bring many benefits. However, we must treat all this rationally and don’t think that everything will be fine if we include SDR. In fact, the internationalization of RMB is a long-term process, and its cycle will last for decades, and the journey of RMB becoming an international currency has just begun. As time goes by, as long as we continue to promote financial reform, the RMB is bound to become one of the most important international currencies in the future.
(Source: CCTV News CCTV Finance)
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