Opinion Leader 丨 Guan Tao
essentials
According to the review criteria for SDR currency weights, the degree of internationalization of the RMB has been further improved in recent years, and the weight of the RMB has been improved, and the status of the third largest currency weight of the SDR has been maintained.
It has been five years since the RENMINBI officially joined the Special Drawing Rights (SDR) basket created by the International Monetary Fund (IMF) on October 1, 2016. How has the internationalization of the RENMINBI progressed during this period? This article is evaluated based on the SDR weight review criteria.
Methodology for determining the weights of the SDR basket currency in 2015
Prior to 2015, the SDR currency basket weighting methodology was adopted in 1978, and each currency weight was obtained by adding up the exports of the currency issuer and the holdings of other countries in the reserves of other countries in the five years prior to the SDR review, and the weights of export and reserve holdings were constantly changing, such as 2/3 and 1/3 of the two in 2010. But as the importance of international capital flows has become increasingly important and private sector flows have grown rapidly, this weight allocation approach no longer applies to reality.
In 2015, the IMF re-examined the methodology for determining the weights of the SDR currency basket, reducing export weights and adding complementary financial variables, including foreign exchange trading volumes, international bank liabilities (ILLs), and international debt securities (IDS) on the basis of the previous formula. The formula for calculating the weight of the SDR currency basket is then 1/2 of the export ratio plus 1/2 of the comprehensive financial indicators. The weights of financial indicators are divided on average into formal sector measures (reserves, 1/3), foreign exchange trading volume (1/3) and indicators of monetary use of private sector international financial activities (i.e. sum of IBL and IDS, 1/3) (see table 1). The well-known share of global international payments, the monthly release of the Worldwide Institute for Financial Telecommunication in Banks (SWIFT), is not among them.
According to the new weight calculation formula, the weights of the US dollar, euro, renminbi, yen and pound sterling in the SDR basket that came into effect on October 1, 2016 are 41.73%, 30.93%, 10.92%, 8.33% and 8.09% respectively. Compared to the 2010 review, the dollar weight was reduced by only 0.17 percentage points; the japanese yen and pound sterling weights were reduced by 1.07 and 3.21 percentage points, respectively; and the euro weight was the most reduced by 6.47 percentage points (see Figure 1). In this sense, the weight of the renminbi mainly comes from the transfer of the weights of the euro and the pound sterling.
Since the SDR review in 2015, the proportion of China's exports has increased
To reflect the role of currencies in global trade, the IMF has historically used exports as a key reference indicator when determining the composition and weighting of the SDR basket of currencies. In the SDR basket currency weight calculation formula, the export ratio refers to the proportion of the average export value of goods and services from a basket issuing country (or monetary union) to the sum of the average exports of all basket currency issuers (or currency unions) in the 5 years prior to the review.
When the IMF determined the weighting of the SDR basket in 2015, it collected data from 2010 to 2014. During this period, China is the third largest exporter after the euro area and the United States, accounting for 9.6% of the total global export scale, only 0.3 percentage points lower than the United States, and significantly higher than Japan and the United Kingdom. It is precisely because of its huge export scale that the renminbi became the third most weighted currency in the 2015 SDR rating review.
Compared with the last review period, the current eurozone export scale is still the first, but China has replaced the United States as the second largest exporter. From 2016 to 2019, exports of goods and services from the euro area and China accounted for 15.51% and 10.61% of the world's total, respectively, an increase of about 1 percentage point over 2010-2014. In the same period, the proportion of US exports rose by only 0.5 percentage points, and the proportion of Japanese and British exports even declined. This means that China's share of exports among the issuers of the SDR basket has risen.
According to the data of the balance of payments published by the International Monetary Fund, from 2016 to 2020, China's exports accounted for 24.87% of the exports of all basket currency issuers, an increase of 1.80 percentage points over 2010-2014 (see Table 2). According to the calculation formula of the SDR currency weight, this 1.80 percentage point increase in the proportion of exports can increase the weight of the renminbi in the SDR by about 0.90 percentage points.
Since the review of the SDR in 2015, the RMB financial indicators have risen and fallen
The share of official reserves has risen
One of the purposes of the SDR was to replenish international reserve assets. To enhance the attractiveness of SDR as an international reserve asset, the IMF needs to focus on the size of reserves held globally in determining basket currency weights. The proportion of reserves in the SDR basket currency weight calculation formula refers to the proportion of the reserve size of a basket of currencies held by the monetary authorities of the non-issuing country to the total basket currency reserve size at the end of the 5 years prior to the review.
On October 1, 2016, the renminbi officially entered the SDR basket, so the IMF began to publish separate data on renminbi reserves held by countries participating in the official Foreign Exchange Reserve Currency Composition (COFER) survey since the fourth quarter of 2016. Survey data shows that in the fourth quarter of 2020, the SDR basket of currencies still accounted for more than 90% of the foreign exchange reserves of separable currencies. Of the five basket currencies, the share of reserves denominated in the other four currencies, with the exception of the US dollar, increased compared to the fourth quarter of 2016, but the increase of the four currencies was less than the decline of the US dollar. As a result, the share of the four currencies other than the US dollar in the total reserves of the SDR basket has also risen. Among them, the proportion of RMB-denominated reserves rose from 1.15% in the fourth quarter of 2016 (close to 1.1% of the total official foreign currency assets held by IMF members in 2014) to 2.43% in the fourth quarter of 2020 (see Table 3). According to the calculation formula of SDR currency weight, a 1.29 percentage point increase in the proportion of RMB reserves can increase the weight of RMB in SDR by about 0.21 percentage points.
The share of foreign exchange transactions has risen
Whether a country's currency is widely traded in major foreign exchange markets is one of the IMF's indicators of whether the currency meets the criteria for free use. In the SDR basket currency weight calculation formula, the proportion of foreign exchange transactions refers to the proportion of a certain currency in the total transaction volume of all basket currencies in the 5 years prior to the review.
The Bank for International Settlements' (BIS) triennial central bank survey counts foreign exchange transactions in major currencies. We represent the data collected at the time of the 2015 SDR review and this SDR review using the average daily turnover of 2010 and 2013, 2016 and 2019 respectively (according to the latest timeline disclosed by the IMF, the next review of the SDR weights is planned in 2022, when the 2022 BIS Global Forex Trading Sample Survey data may be available).
The data shows that the SDR basket currency transaction volume accounts for the vast majority of the total transaction volume of the global foreign exchange market. Among them, the proportion of RMB transactions in the world increased by 2.5 percentage points, the proportion of the US dollar and the british pound increased by less than that of the renminbi, and the proportion of the euro and the yen declined. In the SDR basket of currencies traded, the renminbi accounted for 2.68%, up 1.63 percentage points from the average in 2010 and 2013 (see Table 4). According to the calculation formula of SDR currency weight, the increase in the proportion of foreign exchange transactions by 1.63 percentage points can increase the weight of the renminbi in SDR by about 0.27 percentage points.
The share of international debt securities declined slightly
International debt securities data reflect the use of money in international debt markets. The proportion of international debt securities in the SDR basket currency weight calculation formula refers to the proportion of a basket currency in the total value of international debt securities of all basket currencies at the end of the 5-year period at the end of the review.
BiS data shows that in the fourth quarter of 2020, the SDR basket of currencies accounted for 95.1% of the outstanding balance of international debt securities, up 0.9 percentage points from the fourth quarter of 2015. Among them, the proportion of international debt securities denominated in us dollars and euros increased, and the proportion of pounds, yen and renminbi declined. Among the SDR basket currencies, the balance of RMB-denominated international debt securities decreased from 0.63% in the fourth quarter of 2015 to 0.44% in the fourth quarter of 2020 (see Table 5).
It is worth noting that BIS's approach to classifying debt securities data is that when the place of residence, place of issuance, governing law and place of listing of the direct issuer all point to the same country, it is classified as a domestic debt securities, otherwise it is classified as an international debt securities. Therefore, the data does not include cross-border investments arising from non-resident investments in locally issued securities, i.e. it does not fully reflect the use of international currencies in the bond market.
In addition, since BIS does not separately list rmb-denominated international bank liabilities, this article assumes that the proportion of international bank liabilities at the end of 2020 is the same as in 2015. Then, according to the calculation formula of SDR currency weight, the proportion of rmb-denominated international debt securities decreased by 0.19 percentage points, which can reduce the weight of RMB in SDR by 0.03 percentage points.
Main conclusions
According to the review criteria for SDR currency weights, the degree of internationalization of the RMB has been further improved in recent years.
From the absolute level of various indicators, China's exports of goods and services accounted for a relatively high proportion of all basket currency issuing economies, averaging 24.87% from 2016 to 2020, second only to the euro area; but the proportion of RMB in financial indicators was relatively low, accounting for 2.43% of official reserves at the end of 2020, the average share of foreign exchange transactions in 2016 and 2019 was 2.68%, and the proportion of international debt securities at the end of 2020 was 0.44%, significantly lower than that of the other four currencies.
Judging from the changes in various indicators, the proportion of exports, official reserves and foreign exchange transactions increased by 1.80, 1.29 and 1.63 percentage points respectively, and the proportion of international debt securities fell by 0.19 percentage points. Knowing the coefficients of each indicator in the SDR currency weight calculation formula, assuming that the proportion of international bank liabilities denominated in the renminbi remains unchanged, it can be estimated that the weight of the renminbi in the SDR may have increased by 1.57 percentage points, that is, the weight has risen from 10.92% to near 12.49%, still maintaining the status of the third largest weighted currency in the SDR.
It should be emphasized, however, that this is only the result of a rough estimate based on available data. Due to the different time frames and publication frequencies of different indicators, and the data from 2017 to 2021 (the last five calendar years) will be collected by the IMF in 2022 when it conducts the SDR rating review, and some indicators will be adjusted or supplemented in the calculation process, so the author estimates that the results will be different from the latest weights given by the IMF in 2022. However, due to the small space for adjustment of export share data and the largest share in the SDR currency weight calculation formula, in the new round of SDR valuation review, if the SDR basket currency weight calculation formula remains unchanged, it is expected that the RMB weight will be improved.
(About the author: Global Chief Economist of BOC Securities)