Transcript of an IMF Conference Call on the SDR Basket.
This is a big risk for the IMF and suggests a confidence challenge as they could not resist the pressure from China. The RMB is not yet freely or fully convertible. China has a close-hand on how the currency moves. The IMF is thus handcuffing its own possible monetary policy instrument (it keeps talking about the SDR playing a legitimate role in currency trade settlements). Worse, when firms claim against their own SDR, their fees will be partly held hostage to China’s own rate setting for its currency.
This move by the IMF is too early and mostly as a result of pandering to the growth of China and its [IMF] effort to try to help work with/control how China evolves in the wider world. The RMB should be planned for and accommodated in the SDR, but not until full and free convertibility.
Christine Lagarde, IMF leader, issued a press release today saying that she was recommending to the board that the Chinese currency (RMB) be added to the Special Drawing Rights (SDR) basket of currencies. This would add the renminbi to the dollar, Euro, Japanese yen and British pound. This is yet another move forward for China as they seek to have their currency used as a global reserve currency.
The SDR is not a public tradeable currency. It is a special currency or claim used within the IMF and its members to which members contribute funds to help support those members that need loans from the IMF – perhaps in support of temporary currency exchange difficulties. Britiain, for example, draw on their SDR’s as part of their bail-out by the IMF in the 1970’s. It is remarkable how quickly the IMF is looking to accommodate China’s desires. International firms that trade in Asia need to have a RMB strategy – and soon.