SDR Basket Research Articles

Constraints on currency market movements – Implications for the RMB exchange rate regime

AbstractThis paper reveals the inherent characteristics behind the statistical phenomena of exchange rate interactions and co‐movements, corroborated empirically by exploring a range of currencies with varied degrees of flexibility. It then studies purposely the historical evolution and development prospects of the RMB exchange rate regime. The RMB exchange rate behaviour and statistical patterns are contrasted with the freely floating currencies in this context. Taking up alternative policy positions, the expected developments in RMB characteristics are deliberated, projecting a trajectory for further RMB regime reforms. How the RMB would fulfil the significant role on the global currency market as signified by its position in the SDR basket is contemplated, beyond a conventional policy shift and under the paradigm that the global currency market tends to be tri‐polar.

“West” and “East” in the Global Economic System: Facing a New Bipolarity

The global economic crisis intensifies against the backdrop of inefficient actions of international organizations and individual states. As a result, there is a change in the balance of the world economy. The unipolar economic system is being replaced by a bipolar system that divides the world into the West (USA) and the East (China). In this regard, the problem of economic confrontation between the two powers and smoothing out the imbalance in the world economy due to the collapse of the monopolar world order becomes a relevant problem. This study is devoted to the analysis of the compliance of the Chinese economy with all the characteristics of a leader compared with the US economy. For this purpose, the problem of the competitiveness of the Chinese financial system has been studied. Based on the case study, the development of the Chinese financial market was analyzed in comparison with the US. The main finding is that the role of the Yuan in the international exchange market is insignificant and accounts for 4.3% of the total turnover. In addition, the Yuan is not widely used globally as a reserve currency, although the Yuan has been included in the SDR basket. The general conclusion is that without a freely convertible Yuan and free float, China’s financial system will not be able to compete with the US. Accordingly, China will not be able to become a full-fledged second pole in the global economic system.

Dependence Structure of Yuan and Euro Before and After Yuan Joined SDR Basket: Copula Time-varying Approach

Dependence Structure of Yuan and Euro Before and After Yuan Joined SDR Basket: Copula Time-varying Approach

Emerging influence of the RMB on currency markets in a transpiring tri‐polar international monetary system

AbstractThe up‐and‐coming influence of the RMB on currency co‐movements is examined in this paper, in the context of a transpiring tri‐polar international monetary system advocated in prior studies. The study is empirically conducted against the backdrop of a more variable RMB exchange rate regime, which enables the integration of the RMB into the international monetary system. The influence of the RMB is found most evident in Asia, being modest in Latin America while reaching Africa. The RMB co‐moves most with the currencies of countries that have large shares in trade with China considerably. Meanwhile, a residual‐based instrumental variables model is proposed in this study purposely for dealing with issues of common factor dominance, which prevails in currency co‐movements. The emerging influence of the RMB on currency co‐movements arises at the time when a multiple‐reserve currency system is coming, and the RMB is included as the third largest currency in the SDR basket. It is shored up by the improved infrastructure, strengthened central bank cooperation and expanded networks for cross‐border RMB payments and settlements. It is concluded that the RMB has increasingly integrated into the international monetary system as one of the major players, effecting currency market movements actively alongside the US dollar and euro.

Impact of Macroeconomic Indicators on the Yuan-SDR Exchange Rate

The paper endeavours to explore the macroeconomic impact on the Yuan SDR exchange rate of China during 2017m1-2021m6 to justify the internationalization of RMB which had entered into the SDR basket of IMF in October 2016.To evaluate the impact ,the paper used the methodology of Johansen (1988) cointegration and vector error correction model considering monthly Yuan per SDR as dependent variable and monthly GDP, inflation rate, foreign exchange reserves, export and import as the independent macro-economic variables. The pattern of trendline of Yuan per SDR is found nonlinear having cyclical fluctuations and seasonal variations according to Hamilton (2018). The paper also found that Yuan per SDR has significant long run causalities with export, import, inflation rate, GDP and foreign exchange rate of China during the specified period. Even, Yuan per SDR has significant short run causality with export only. The cointegrating equation converged towards the equilibrium with the speed of adjustment 11.83% per month significantly. The impulse response function of import to Yuan per SDR showed significantly convergent. The VECM contains autocorrelation problem and unit root for which it is non-stationary.

Chinese Yuan Per Sdr During Covid-19

In this paper, author seeks to explore the dominant determinants that would influence the behaviour of Yuan per SDR especially during the period of Covid-19 from 2020m1 to 2021m7 since Yuan enters into the SDR basket from October 2016.Author selected three dimensions such as dominant macro variables, exchange rates and important capital market indicators. The paper found that Yuan/US$ had great influence on Yuan per SDR rate, export, import and foreign exchange reserves which affected Yuan per SDR rate and market capitalization, number of listed companies, Shanghai Composite Index and interbank lending trading volume have significant impact on the Yuan per SDR during the specified period. The paper focus on the policies of capital account convertibility, exchange rate stability, more participation in interbank lending, balance the onshore and offshore RMB market, and strengthening capital market of China.

Is a New Asian Monetary Fund Emerging?

The plan initiated by Japan for forming an Asian Monetary Fund in a mode of ASEAN+3 countries after Asian financial crisis in 1997 was not realised due to opposition from USA, IMF and China and the plan was revamped through CMI multilateral currency swap and pacific nation’s joining with US Dollar hegemony but at present it is confronting Chinese supremacy over the region. Thus, in this paper the author thought of forming a new Asian bloc consisting of SAARC, ASEAN, GCC, China, Japan and Korea for which a new framework of Asian Monetary Fund can be set up with a view to not only supplying additional liquidity in crisis period as well as for developmental finance but also can function for issuing a common currency of the new Asian bloc that is a currency basket which will be formed by currencies of China, Japan and Korea and the currencies of blocs viz SAARC, ASEAN and GCC where unit of account of currency will be measured by gold or silver and the exchange of currency unit of Asia is primarily fixed with Chinese Yuan. The exchange rates of all currencies in the basket will be calculated daily through floating exchange rate mechanism in Asian bloc and common currency will also be floated in SDR basket if CUA is included in SDR basket. The exchange rates will be maintained by Asian Monetary Fund through target zone of ±2.5% fluctuation. The plan also requires monetary and trade integration as well as political integration with the implementation of Asian stock exchange institute, Asian Parliament, Asian Security council, Asian Central Bank and Asian Clearing Union respectively. The common barriers like Sino-Japan rivalry, US dollar hegemony, non-cooperation from IMF, premature OCA criteria and low capital market internationalisation may delay the process of Asian Economic Integration towards formation of a new Asian Monetary Fund.

Пятилетие включения юаня в корзину СДР: итоги и перспективы

Received 29.01.2021. The renminbi was included in the SDR basket from October 2016. In that time there were a lot of doubts about whether the renminbi was enough freely used currency to comply with the criteria of such inclusion. Other opinions focused on possibility that this inclusion would boost international usage of the renminbi. The author analyses statistics and comes to conclusion that the maximum boost of the renminbi usage was achieved right before the inclusion. The China’s statistics shows the boost of renminbi usage in the external transactions in 2016–2020, but statistics of its trading partners and SWIFT reveal only moderate growth or even stagnation in this period. One of explanation of this discrepancy may be that despite Chinese banks’ substantially increased external lending in renminbi in recent years, it looks that banks actually do not transfer renminbi abroad to borrowers. Banks just remit these sums to Chinese suppliers under the instructions by foreign borrowers. Then those borrowers repay those renminbi loans most likely in dollars. So China’s statistics record boost of renminbi usage, but its trading partners do not see those renminbi. The key obstacle for widening international usage of renminbi is remaining restrictions (formal and informal) for transactions under the financial account of China’s balance of payments. The author considers prospects of increasing the international role of the renminbi and comes to conclusion that it is likely that China is afraid of liberalisation of its financial accounts because there is a risk of long-term depreciation of the renminbi. Contrary to widely popular belief that China stands for and practiced with undervalued exchange rate of the renminbi the author statistically shows that in the past 25 years the renminbi was stronger than the G7’s currencies and substantially stronger than the currencies of China’s neighbour competitors. It looks that devaluation-averse sentiments hinder China’s decision makers from introduction of real liberalisation of its financial account, because free transborder movements of capital may create sharp depreciating impact on the renminbi and thus undermine Chinese economic achievements of last decades. That’s why it is unlikely that the renminbi will substantially increase its international role in the foreseeable future.

Exchange rate co-movements and corporate foreign exchange exposures: a study on RMB

We estimate the time-varying co-movements of a large set of bilateral exchange rates/the RMB and explore their relationship with the firm-level exchange rate exposure in China. We find that firms’ exchange rate exposure increases in periods of high exchange rate co-movements. The co-movements of emerging market (EME) currencies have a weaker effect on exposure than the co-movements of developed market (DM) currencies. This effect is more pronounced after the launch of the One Belt One Road initiative, RMB inclusion in the SDR basket and in highly multinational firms, providing evidence that the RMB’s internationalization (i.e., its anchoring effect) has generally helped to reduce Chinese firms’ exposure to exchange rate fluctuations of EME currencies.

Chinese Yuan Per SDR During Covid-19

In this paper, author seeks to explore the dominant determinants that would influence the behaviour of Yuan per SDR especially during the period of Covid-19 from 2020m1 to 2021m7 since Yuan enters into the SDR basket from October 2016.Author selected three dimensions such as dominant macro variables, exchange rates and important capital market indicators. The paper found that Yuan/US$ had great influence on Yuan per SDR rate, export, import and foreign exchange reserves which affected Yuan per SDR rate and market capitalization, number of listed companies, Shanghai Composite Index and interbank lending trading volume have significant impact on the Yuan per SDR during the specified period. The paper focus on the policies of capital account convertibility, exchange rate stability, more participation in interbank lending, balance the onshore and offshore RMB market, and strengthening capital market of China.

China and the SDR: Financial Liberalization through the Back Door

We analyze the motives for China’s campaign to secure the addition of its currency, the renminbi, to the basket of currencies comprising the International Monetary Fund’s Special Drawing Rights. Our argument is that the campaign to add the renminbi to the SDR basket was not just a vanity project; it was a strategy used by the advocates of financial liberalization in China to force the pace of reform. It was also a strategy with significant risks.

ОСОБЛИВОСТІ ПРОЦЕСУ ІНТЕРНАЦІОНАЛІЗАЦІЇ ЮАНЯ НА РИНКАХ БОРГОВИХ ФІНАНСОВИХ ІНСТРУМЕНТІВ

The article addresses the crucial aspects of rising need for actual onshore funding in RMB through panda bonds or other potential options, such as direct loans from local banks or fully funded swaps in RMB. Also, the alternative of well-known dim-sum Actual problems of international relations. Release 139. 2019 108 market of Hong Kong should be carefully considered. The features of onshore and offshore funding for multinational companies are examined. Many international corporates, financials and multilateral institutions already have Asian currencies embedded in their issuance programs. A lot of them have significant economic ties to China. The outstanding volume of China’s bond market has surpassed RMB 70,4 trillion (approximately USD 10,6 trillion) in the August 2017, making in the third largest in the world. Significant changes in the structure of such issues are the subject of analysis carried out. Theoretically substantiated the role and place of RMB in the development of China’s bond market. With the inclusion of RMB into the SDR basket and ongoing market-based reform of the RMB exchange rate regime, China’s bond market will continue to attract interest from foreign issuers. The conclusion of the author : internationalization of yuan reflects the efforts to make the domestic bond market more accessible and attractive to foreign issuers and investors, meanwhile boosted by continuous progress on the pilot program of panda bonds, an expanding pool of practical knowledge, and more sophisticated systems and rules, the panda bond market is expected to achieve more progress in the competition with Hong Kong for offshore RMB funding through traditional dim-sum market.

Study on the Influence of RMB’s Entry into SDR on the Interest Rate of SDR

On October 1, 2016, with the approval of the International Monetary Fund, the RMB officially joined the SDR currency basket, which not only recognized the international status of RMB, but also injected new vitality into the development of the world economy. SDR interest rate is an important part of SDR valuation and pricing. Based on the background of RMB entering the SDR currency basket, this paper divides the study period into three parts to analyse the impact of RMB enter the basket on the SDR interest rate: a complete review period before the RMB included; the IMF announced that it will accept the RMB but not yet; and the RMB is officially “add to the basket”. The results of the study show that RMB’s participation in the SDR basket significantly improves the SDR interest rate level, helps to improve the stability of the SDR interest rate and the representation of the SDR interest rate to the global economy, and is expected to help build a new order in the international monetary system.

Lost in internationalization: Rise of the Renminbi, Macroprudential Policy, and Global Impacts

The internationalization of China’s Renminbi will be a game changer to the global finance and politics, and its success thus far has been evidenced by the International Monetary Fund (IMF)’s recent move to include the currency in its SDR basket. This scheme provides a unique opportunity to reflect on the very nature of law and finance and calls into question the conventional understanding of how financial institutions function: Why has authoritarian China, with its peculiar market settings, been able to make rapid progress in internationalizing its currency? This article applies the theory of macroprudential policy to examine the scheme’s viability, timeline, and impacts. It argues that currency internationalization does not only depend on market forces but also requires strong state-led actions at critical junctures to reset the institutional equilibrium. China has taken advantage of its extra-large economy by carrying out fragmented but coherent institutional engineering, and adopting an institutional bridging approach for amplifying the effects. However, systemic risks inherent in China’s banking system have been triggered by the project’s international success due to its aggressive timeline and procyclical nature. In this regard, this scheme has wrongly pitched itself as an international project rather a domestic one. As a responsible issuer of a major international currency, China has to re-align the project to focus on domestic institutions macroprudentially, with special caution paid to any attempt to pursue the prestige normally conferred upon such issuers, including extraterritoriality and export of institutional designs overseas.

China-IMF Collaboration: Toward the Leadership in Global Monetary Governance

This paper analyses China’s collaboration with the IMF in various programmes, including China’s participation in IMF technical assistance programmes, IMF country surveillance for China, China’s attempt to weaken the US dominance in the international monetary system through the IMF, and the RMB’s entry to the SDR basket. The results of these collaboration activities reflect the extent to which the IMF assists China in pursuing leadership in global governance of monetary policies. The paper raises two key points. First, it highlights the impact of Chinese actors’ interests and objectives regarding China’s domestic economic development and outward expansion on their government’s interaction with international organizations. Second, it argues that the result of China-IMF collaboration is determined by two conditions (a) the compatibility between Chinese and IMF interests and objectives regarding key economic and political issues, and (b) China’s relative role in the IMF’s institutional governance in comparison with the Fund’s other member states.

(The Beginning of the China-Led New Financial Order and Korea's Countermeasures)

English Abstract: The emergence of China in the international financial order can be analyzed in three aspects: strengthening its position within the IMF system led by the West, establishing a new financial order through multilateral development banks (MDBs) like the AIIB and NDB, and the internationalization of the renminbi (RMB). China has steadily demanded an increase in its share in the IMF. Following the effectuation of the reform plan in 2016, China became the third largest member of the IMF and the RMB is now included in the SDR basket. China also succeeded in launching the AIIB by formulating a consensus on the necessity for launching an alternative multilateral development bank in Asia where the ADB had a monopoly. On the other hand, RMB internationalization is executed based on a set of internal and external goals: stabilizing inflation and the engine for internal reform, and consolidating the international status of China. As a result, RMB settlements accounted for approximately 2% in world trade, while investment accounted for 16.6% in 2015. However, the RMB still accounts for only 0.6% of the global bond market, and only 1.1% of global foreign reserves. As such, although the internationalization of the RMB has achieved some degree of success, it is hardly keeping up with the extent to which China’s economic power is growing.For the China-led financial order to take root, China should continue to pursue further reforms and openness regarding free convertibility, capital accounts, and the exchange rate. China, however, is maintaining a cautious approach. Some of the reasons for this are as follow. First, there are concerns about an outbreak of financial crisis through the opening up of China’s capital account. Second, there are fears that there will be an increase of non-performing loans and decrease of interest rate in the event of non-interference by China’s financial authorities. As China also has tried to maintain a managed floating system and to allow capital opening only on an experimental basis, it will not be easy for it to expand its influence in the international financial market in a short period of time. Moreover, as the recent appreciation of the yuan has weakened, the impetus for internationalization of the RMB has weakened.Korean Abstract: 2016년 들어 AIIB가 운영을 개시하고, 위안화가 IMF의 SDR 통화바스켓에 편입되면서 국제금융질서에서 중국의 위상이 날로 높아지고 있다. 이에 본 연구는 중국 주도의 신금융질서 태동의 의미와 전망, 중국 중심 국제금융기구의 구조와 운영, 위안화 국제화와 통화블록 형성 가능성 등을 분석하였다. 이를 바탕으로 한국의 중장기 정책대응 방향과 함께 기업의 인프라 건설 참여방안, 민간 금융기관의 인프라금융 참여방안, 정부의 정책 지원방향을 제시함으로써 급변하는 국제금융질서에 대한 한국의 대외 입장 정립과 국익 확보에 기여하고자 하였다.

КИТАЙСКИЙ ЮАНЬ КАК МИРОВАЯ ВАЛЮТА: ИМПЕРАТИВЫ И РЕАЛЬНОСТЬ

In recent decade, the PRC has implemented a number of measures aimed at expanding the area and scope of international use of its national currency. This already ensured the inclusion of the Yuan on a par with the US dollar, Euro, Pound sterling and Japanese yen into the SDR basket. Widely used worldwide as a measure of value, means of payment and store of value, national/single currency of the United States, Euro zone, UK and Japan currently are the world’s leading currencies. The acquisition of international status is based on certain conditions that characterize the country’s reliability in the global financial system and the possibility of performing various operations in its national currency. Depending on their nature, these conditions can be divided into two groups: economic as well as institutional and organizational. On the basis of comparative analysis of conditions for improving the international status of the Yuan, and the conditions for achieving and maintaining status as a world currency of the U.S. dollar, Euro, pound sterling and Japanese yen, it is shown that China has not yet formed all necessary determinants of non-residents’ demand in national currency. Confirmation of this conclusion is shown at a lower compared to world currencies, the internationalization of the Yuan, the valuation of which is carried out on the basis of quantitative indicators used by IMF to determine whether a currency is classified as “freely usable”. Renminbi’s achievement of a world currency status is possible only in case of ensuring its full convertibility, deepening stock and debt sectors of the PRC’s financial market and can be carried out only after a time sufficient for the manifestation of external network effects, i.e. to reorient the choice of non-residents in favor of Chinese monetary unit as a measure of value, as a mean of payments and as a reserve fund.&nbsp

Review of the Fund's Income Position for FY 2016 and FY 2017-2018

The Fund’s total net income for FY 2016 including surcharges is projected at about SDR 1.0 billion or some SDR 0.15 billion higher than expected in April 2015. Lending income continues to be the main source of income and is in line with April 2015 estimates. Investment income has fallen reflecting the decline in equity markets that exceeded the modest returns on fixed income securities. As a result of the 5-yearly review of key actuarial assumptions, the IAS 19 adjustment (relating to reporting of employee benefits) is expected to contribute about SDR 0.3 billion to net income in FY 2016. The paper recommends that GRA net income of SDR 1.1 billion for FY 2016 (which excludes projected losses of the gold endowment), be placed equally to the special and general reserve. After the placement to reserves, precautionary balances are projected to reach SDR 15.2 billion at the end of FY 2016. Following the completion of the Board’s review of the investment strategy for the Fixed-Income Subaccount, the paper further proposes to transfer currencies equivalent to the increase of the Fund’s reserves for FY 2014 and FY 2015 (totaling SDR 2.6 billion) and FY 2016 (estimated at SDR 1.1 billion), from the GRA to the Investment Account. The paper proposes that the margin for the rate of charge be set at 100 basis points for the two years FY 2017 and FY 2018. This follows a comprehensive review of the underlying factors relevant for the establishment of the margin this year and also takes into account the impact of the inclusion of the renminbi in the SDR basket on Fund income and borrowing costs. The projections for FY 2017 and FY 2018 point to a net income position of SDR 1 billion and SDR 0.7 billion, respectively. These projections are subject to considerable uncertainty and are sensitive to a number of assumptions.

Currency Amounts in the SDR Basket - Proposed Changes to the Rounding Methodology

Currency amounts are used to determine the daily value of the SDR. Currency amounts are the number of units of each currency in the SDR basket. The value of the SDR (in U.S. dollars) is the sum of these amounts, valued at daily exchange rates of the currencies against the U.S. dollar. These currency amounts are determined on the last business day before the new SDR basket becomes effective (transition date) such that they correspond to the currency weights determined by the IMF Executive Board in the context of the SDR Review, and remain fixed over the SDR valuation period. To facilitate SDR users in adjusting their portfolios to the new basket, the IMF publishes illustrative currency amounts in the lead up to the transition date.

Separate Identification of the Chinese Renminbi in the COFER Survey

Following the recent Executive Board decisions on the determination of the renminbi (RMB) as a freely usable currency, effective October 1, 2016, and its inclusion in the SDR basket on the same date, STA intends to separately identify the RMB in the survey on Currency Composition of Official Foreign Exchange Reserves (COFER) beginning with the survey for the fourth quarter of 2016. Consistent with staff’s commitment to consult the Executive Board before separately identifying additional currencies in the COFER survey, this paper sets out the key considerations for the envisaged inclusion of the RMB in the COFER survey.