CCTV-NEWS：赵克锋：YUAN OFFICIALLY JOINS SDR

Q1 What are the effects of RMB's inclusion to the SDR？

There are two major effects.

The first effect is on Foreign Reserves.

About 1 per cent of global reserves are in RMB. There are estimates saying that this could rise as high as 5 per cent by 2020. From an accounting standpoint, the RMB some countries are holding is only counted as foreign assets not foreign reserves because the RMB did not have a more official status in international financial organisations. With the attainment of SDR, the willingness to hold RMB as reserves is definitely increasing worldwide. For one effect, the RMB will become one of the five official currencies for IMF-related transactions. But as of now, the holding of RMB is both wide and thin. Nearly 60 countries hold some RMB as reserve but a lack of of a deep bond market yet has compromised the world's willingness to increase RMB's holding.  China's central bank has demonstrated competency in keeping inflation low and stablilizing currency. But a deep bond market is a prerequisite because the Chinese Central Bank must be viewed by the world as being able to provide liquidity, in which a deep bond market is required to perform open market operations smoothly.  Even with the SDR status, the effect of other central banks to hold more RMB to benchmark their reserve portfolios to the SDR basket weightings is not that high. This is because the whole SDR outstanding amounts to only about USD300 billion, compared with close to USD12 trillion global reserves. Not to mention that China's weight is only 10.9% in the basket.  

The second effect is on Portfolio Rebalancing.

It is immediate that international organisations need to rebalance their portfolio because of this. The IMF, BIS, and WB need to do so as they have some SDR denominated assets. So does other countries and international investors especially when their debts are denominated in SDR because they need to increase the weighting of RMB to hedge the exchange rate and interest rate risks. The question is really how much. Some international investors have argued otherwise because the impact on global portfolio decisions will ultimatley come from foreign investors’ assessment of China’s fundamental outlook and the opening of China’s capital account.


Q2 What are the implications for emerging markets？

Since an immediate opening up of China's capital account is not a prerequisite of the SDR status, we shouldn't be seeing a huge swing in the RMB market, and thus immediate exchange rate risk with emerging countries is minimal at this point. According to the foreign exchange intervention index constructed by the macro-economics group in my university, we do not see Chinese Central Bank's huge market intervention most of these two months.

But some of these emerging markets have debt denominated in SDR and they could all pay IMF-related transactions in RMB, now that RMB attained the SDR status. The status will further strengthen what has been going on to help international community to hedge exchange rate risks.

During the 1997 Asian financial crisis, Asian countries have suffered severely even when IMF and the United States appeared to be helping. These countries started to develop a network of swap agreements intended to supplement foreign exchange reserves. China has about US$500 billion of swap agreements with about 30 countries.

The usage of the renminbi will reduce the losses caused by US dollar exchange fluctuations in bilateral trade activities. It is still a long road head. An international currency serves multiple functions: foreign reserves, payments for transactions, trade finance, foreign exchange trading, and measures of value.