Monday, November 30, 2015

IMF Adds the Yuan - Announces New Weighting for SDR Basket

As expected the IMF today announced that they will add the Chinese Yuan to the SDR currency basket. This Bloomberg article also says the new weighting for each currency in the basket has also been decided. The Euro takes a big hit downward while the US dollar stays about the same at the top. Below are some quotes from the Bloomberg article.


"The IMF will add the yuan to its basket of reserve currencies, an international stamp of approval of the progress China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan.
The International Monetary Fund’s executive board, which represents the fund’s 188 member nations, decided the yuan meets the standard of being “freely usable” and will join the dollar, euro, pound and yen in its Special Drawing Rights basket, the organization said Monday in a statement. Approval was expected after IMF Managing Director Christine Lagarde announced Nov. 13 that her staff recommended inclusion, a position she supported.
The addition will take effect Oct. 1, 2016, the IMF said. The fund said the yuan would have a 10.92 percent weighting in the basket. Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound."
My added comments: The new ratio for the SDR basket came in pretty close to what this earlier Reuters article had projected. The yuan comes in at the lower end of expectations but, still above the Yen and the Pound. The Euro takes a big hit downward while the US dollar kept virtually the same ratio and took no hit at all. The Pound actually took the biggest % hit downward falling 28% while the Euro fell 17% in the ratio.
The possible political messages I see from this:
- Win-Win for China and the US (China gets in above 10% as third highest and the US sends the message that the dollar still rules the roost).
- Euro/UK area takes a prestige hit as the Euro drops the largest in absolute terms and the Pound drops the most in % terms. 
- the Yen and the Pound drop below the Yuan indicating that rewarding China was a high priority for the IMF. It may be because the IMF has failed to get the 2010 reforms (giving China more voting power) approved.

- Reasonable question to ask: Has the recent strong move up by the US dollar vs. the Euro been in anticipation of this ratio change in the SDR basket?

Other article links:
Q&A from IMF web site
Asia Times
Wall Street Journal

No comments:

Post a Comment