YUAN IN THE GLOBAL

CURRENCY MARKET
 SPECIAL DRAWING RIGHT (SDR)
• An interest-bearing international reserve asset, created by the IMF in 1969
to supplement its member countries’ official reserves
• Serves as the unit of account for IMF and other international organisations
• The value of the SDR is based on a basket of five currencies—USD, Euro,
Yuan, Yen and Pound Sterling
• The value is calculated daily and its interest rate is determined on weekly
basis
• As on April, 2018, its value was 204.2 billion, allocated to members
• The IMF executive board reviews the SDR basket every 5 years and the
composition is revised to reflect major changes in the roles of various
currencies in the world economy. This enhances the attractiveness of SDR
as a reserve asset.
• In the last review in 2015, Chinese Yuan was added
 SPECIAL DRAWING RIGHT (SDR)
• SDRs are allocated to member based on
their IMF quotes and economic standing in
the economy.
• These allocations allow members with on
demand access to freely useable
currencies
• These can be exchanged between
members for freely useable currency to
meet BOP needs or adjust composition of
their reserves.
• Hence, it is neither a currency nor a claim
on the IMF but a potential claim on the
freely usable currencies of IMF members.
 SPECIAL DRAWING RIGHT (SDR)
• Member country is assigned with two positions of the same amount: SDR
allocation and SDR holdings.
• Interest is received on the holdings and paid on its allocations
• SDR market works on voluntary trading arrangements facilitated by the IMF
• Interest is paid/received if there is a shortfall/excess in member country ’s
cumulative allocations
• Providing liquidity and supplementing member countries’ official reserves
 INCLUSION OF RENMINBI TO SDR
• Effective October 1, 2016 the IMF is added the Chinese renminbi (RMB) to the basket
of currencies that make up the Special Drawing Right, or SDR.
• The RMB’s inclusion is a milestone in the integration of the Chinese economy into the
global financial system as it substantially increases in the international use and
trading of the renminbi.
• Issuers of reserve currencies generally meet high transparency standards. The
Chinese authorities have taken steps to increase data disclosure and enhance their
transperancy.
 CRITERIA FOR INCLUSION IN THE SDR
There are two main criteria for a currency to be included in the SDR basket:
• The first is the export criterion, which requires that the currencies in the basket be
issued by the top exporters of the world. It has been part of the SDR methodology since
the 1970s and it aims to ensure that the currencies that qualify for the basket are those
issued by members or currency unions that play a central role in the global economy.
• The second is the requirement for currencies in the SDR basket to be determined by the
Fund to be “freely usable”—that is, widely used to make payments for international
transactions and widely traded in the principal exchange markets. This criterion
became part of the SDR methodology in 2000 to capture the importance of financial
transactions in the global economy.
 WHAT MOTIVATED THE CHANGE IN THE SDR BASKET?
• The IMF Executive Board’s decision to include the RMB was taken in the context of the Review of
the Method of Valuation of the SDR, which takes place every five years. These reviews typically
evaluate the selection criteria for the currencies that should be part of the basket, the selection
of currencies, the weighting methodology, and the composition of the basket. The SDR valuation
framework aims at supporting the SDR as an international reserve asset.

• The conclusions of 2010 SDR valuation review, subsequent discussions by the Board in 2011 and
the increasing importance of the Chinese economy determined that the 2015 review should
focus on the building blocks relevant for the determination of whether to include the RMB in the
basket.

• In 2015, the Chinese yuan exceeded the Japanese yen to become the world's fourth largest
payment currency. Through successful inclusion into the SDR basket, the RMB would account for
roughly (14-16 %) of the SDR basket, standing behind the U.S. dollar (41.9 %) and Euro (37.4 %),
and in front of the British pound (11.3 %) and Japanese yen (9.4 percent). The statistics mean a
win-win result for the IMF and China.
• A significant cross-departmental analysis to examine complex issues, given the development of
financial markets, allowed the Executive Board to conclude that the RMB can now be
considered widely used and widely traded.

• RMB’s inclusion further diversifies the SDR basket and makes its composition more
representative of the world’s major currencies. As such, the inclusion is expected to enhance
the attractiveness of the SDR as an international reserve asset.
 BENEFITS OF RNB’S INCLUSION TO SDR
• First, the inclusion of the RMB in the SDR basket consolidates the RMB’s
internationalization process. The internationalization of a currency imposes strong
requirements on its markets and institutions. This includes developing deep and liquid
financial markets, achieving a certain degree of openness of the capital account,
delivering predictable macroeconomic outcomes, strong and credible institutions, and
securing the integrity of the markets. Thus, consolidating and further strengthening the
RMB internationalization process will help strengthen the Chinese economy, and
therefore the global economy.

• Second, the inclusion of the RMB in the SDR basket enhances the attractiveness of the
RMB as an international reserve asset. This will help with the diversification of global
reserve assets.
SHARE OF ALLOCATED FOREIGN
EXCHANGE RESERVES
 BROADER INTERNATIONAL ADOPTION OF
YUAN
• For the past 70 years, the US dollar has been the world’s dominant
currency.
• Two-thirds of the world’s $6.9 trillion allocated foreign exchange reserves
are held in US dollars.
• Still, as of the third quarter of 2017, just over 1% of foreign exchange
reserves were held in yuan
• The Chinese yuan hit a two-year high against the US dollar when German
Bundesbank said that it would include the yuan in its reserves for the first
time.
• The French central bank revealed that it already held some reserves in
yuan.
•In June, the European Central Bank announced that it had exchanged €500
million ($611 million) worth of US dollar reserves into yuan securities.
• Though it was a small shift as the ECB has €44 billion in foreign exchange
reserves—but nonetheless it reflects China’s growing prominence in the
global financial system.
• Barry Eichengreen, an economics professor at the University of California,
Berkeley and expert in global currency systems, predicts that the US dollar
will eventually lose its dominance and multiple currencies will coexist on a
more equal footing in international markets.
• In the future, the dollar will be forced to share prominence with the yuan
and the euro in particular
TRADE FLOWS OF CHINA
 BENEFITS OF YUAN BECOMING A
RESERVE CURRENCY
• The yuan would be used to price more international contracts.
• China exports a lot of commodities that are traditionally priced in U.S.
dollars. If they were priced in yuan, China would not have to worry so much
about the dollar's value.
• All central banks would have to hold yuan as part of their foreign exchange
reserves.
• The yuan would be in higher demand eventually that would lower interest
rates for bonds denominated in yuan.
• Chinese exporters would have lower borrowing costs.
• China would have more economic clout in relation to the United States.
 Switch of Reserves
•More than 60 have adopted yuan as new reserve currency. Offshore
institutions held a total of 1.44 trillion yuan ($225.2 billion) worth of
interbank bonds at the end of May,2018
•European Central bank investment in yuan denominated assets.
•Growth of yuan in cross border transactions and increase in its use by
financial institutions as global payment by value.
•China granted the United States a quota of 250 billion yuan ($38
billion) under China's Renminbi Qualified Foreign Institutional
Investor program.
•Nigeria also signed a currency swap worth $2.4 billion with China &
MEFMI to service it loans in yuan
 Reasons Against the Switch
• CHINESE CAPITAL MARKETS LACK LIQUIDITY AND TRANSPARENCY IN ITS
POLICY.
• U.S HAVE NEVER DEFAULTED
• CHINA STILL COMMUNIST ECONOMY, ITS POLICIES DO NOT RESPOND TO
MARKET FORCES LIKE THOSE OF DEMOCRACIES.
• LOW LEVEL OF CONSUMERISM
• ECONOMY DEPENDS HEAVILY ON EXPORTS TO ONE NATION I.E. U.S AND
FACES LACK OF SUPPLY OF RAW MATERIALS