IMF puts Chinese RMB on track as world currency

The executive board of the Washington-based International Monetary Fund (IMF) says it has completed a five-yearly review of the “basket of currencies” that make up the Special Drawing Right (SDR) and has decided that the Chinese RMB meets all existing criteria.

The IMF describes the SDR as “an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of key international currencies, and SDRs can be exchanged for freely usable currencies,” the organization says.

“Effective Oct. 1, 2016, the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound,” the IMF has announced. Launching the new SDR basket on Oct. 1, 2016, will provide sufficient lead time for the IMF, its members and other SDR users to adjust to these changes, adds the organization.

“The executive board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system,” says Christine Lagarde, managing director of the IMF. “It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

The value of the SDR will be based on a weighted average of the values of the basket of currencies comprising the five currencies. The inclusion of the RMB is intended to enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.

The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies in the SDR basket, which will soon include China. “Authorities of all currencies represented in the SDR basket, which now includes the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the IMF, its membership and other SDR users in their currencies.”

In a presentation at the Bureau of International Recycling (BIR) Autumn 2015 convention in Prague in October, steel industry analyst Becky E. Hites touched upon the possibility of the RMB’s inclusion and what it might mean in the commodities sector.

Hites, president of Atlanta-based Steel-Insights LLC, said the strength of the U.S. dollar has shifted price competitiveness away from the U.S. in favor of emerging economies, such as China, where raw material inputs in local currencies have dropped relative to the dollar, lowering costs to produce steel.

“In a market that is oversupplied, classic economic theory dictates that the price will drop until the higher priced supply is removed from the market and a new lower equilibrium price is reached,” according to Hites’ presentation. “Thus, the lowest cost market will set the price, and the higher dollar value will, by definition, prohibit any strong currency countries from being the low cost producer country.”

The playing out of that theory in 2014 and 2015 has provided a difficult circumstance for both steel producers and ferrous scrap suppliers in the U.S., according to Hites.