The official website of the People’s Bank of China announced today that on May 11, 2022, the Executive Board of the International Monetary Fund (IMF) completed the five-yearly Special Drawing Right (SDR) valuation review. This is the first review since the yuan became an SDR basket currency in 2016.
The IMF Executive Board unanimously decided to maintain the current composition of the SDR basket of currencies, which is still composed of the US dollar, the euro, the RMB, the Japanese yen and the British pound, and to increase the weight of the RMB from 10.92% to 12.28% (an increase of 1.36 percentage points). The weight of the US dollar was raised from 41.73% to 43.38%, while the weight of the euro, yen and pound was lowered from 30.93%, 8.33% and 8.09% to 29.31%, 7.59% and 7.44% respectively, and the weight of the RMB remained in third place. The Executive Board decided that the new SDR currency basket will take effect on August 1 this year, and the next SDR valuation review will be carried out in 2027.
The People’s Bank of China pointed out that China’s confidence and will in reform and opening up will not be shaken, and China will always adhere to expanding high-level opening up. In the next stage, the People’s Bank of China, together with various financial management departments, will continue to unswervingly promote the reform and opening up of China’s financial market, further simplify the procedures for foreign investors to enter the Chinese market, enrich the types of investable assets, and improve data disclosure. Improve the business environment, extend the trading hours of the inter-bank foreign exchange market, continuously improve the convenience of investing in the Chinese market, and create a more favorable environment for foreign investors and international institutions to invest in the Chinese market.
The so-called Special Drawing Rights (SDR), known as “paper gold”, is an international reserve asset created by the International Monetary Fund in 1969 to supplement the official reserves of member states. Member countries balance the balance of payments. When a member country has a balance of payments deficit, it can use SDR to exchange foreign exchange with other member countries designated by the IMF to repay the balance of payments deficit or repay IMF loans.
Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, believes that the increase in the weight of the SDR means that the RMB is more widely used and popular in international trade, foreign exchange reserves, international foreign exchange transactions, investment and financing, and the internationalization process will gradually accelerate. He believes that China is actively promoting high-level opening to the outside world, improving infrastructure construction such as RMB cross-border settlement, investment and financing, and facilitating global investors to participate in the domestic financial market. Therefore, there is still a lot of room for RMB to increase in the weight of SDR in the future.
In addition, according to the “Currency Composition of Official Foreign Exchange Reserves (COFER)” data for the fourth quarter of 2021 released by the IMF last month, the proportion of RMB increased from 2.66% in the third quarter to 2.79%, continuing to rank as the fifth largest reserve currency in the world. The IMF’s highest level since 2016, when it began reporting yuan reserve assets. At present, the US dollar (58.81%), the euro (20.64%), the Japanese yen (5.57%), and the British pound (4.78%) are ranked ahead of the RMB. Although the RMB is moving towards internationalization, it is far from the US dollar and the euro. , I believe that in the short term, it has a chance to surpass the Japanese yen and the British pound to become the world’s third largest reserve currency.