China’s Influence Grows at the IMF As the Yuan Strengthens Its Status as a Reserve Currency.
China's strategy seems to be paying off.
Some call it the yuan, others the renminbi. But whatever you choose to call the Chinese currency, one thing is clear: it has just consolidated its status as an international reserve currency.
Last weekend, during a review of the composition of the Special Drawing Rights (SDR), the International Monetary Fund (IMF) announced the strengthening of the Chinese yuan.
SDRs are the multilateral institution's unit of account and international reserve currency and are made up of a basket of currencies. In the new weighting that was announced, the yuan sees its share increase from 10.92% to 12.28%, which makes it now the third currency in the basket. The U.S. dollar, which also saw its weighting increase, now represents 43.38% of the basket instead of 41.73%.
The euro, the yen, and the pound sterling are the victims of this new distribution. The single European currency, which remains in second place, now weighs only 29.31% instead of 30.93%. The yen's weight has been reduced to 7.59% (from 8.33%), while the pound's weight has been fixed at 7.44% (8.09%). The change will go into effect on August 1.
This is the first time since 2015 that the relative weight of the component currencies of these SDRs has been recalculated since the Chinese currency entered the basket in 2016 as the fifth reserve currency. Given the pandemic crisis, the review has been delayed since this exercise takes place every five years. In March 2021, the fund's board of directors decided to extend the current basket until July 31, 2022.
According to the calculation methods in force since 2015, the composition of the SDR basket is based on a rather complicated formula. The currencies concerned must be “freely usable”, and “widely used to settle international transactions”. The formula takes into account the value of exports of goods and services of the countries involved during the previous five years.
To this assessment of the country's weight in world trade is added a financial indicator that includes, in equal parts, the official reserves denominated in a country's currency that are held by other monetary authorities that do not issue that currency, the volume of foreign exchange transactions in that currency, as well as the sum of outstanding international bank liabilities and international debt securities denominated in that currency.
However, this formula is not entirely satisfactory. The IMF, therefore, encourages further reflection on the weights used “to ensure that they continue to adequately reflect the role of currencies in world trade and financial markets”. In the meantime, China's strategy is paying off: its weight in world trade rose from 13.5% to nearly 15% between 2015 and 2020, according to UNCTAD (United Nations Conference on Trade and Development).
And Beijing is seeing its influence grow within international institutions.
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