On January 13, 2016, the Bretton Woods Committee hosted a virtual conference titled China, the Renminbi, and the IMF's Special Drawing Rights (SDR). Speakers discussed the significance of the November 2015 decision by the International Monetary Fund (IMF) to include the renminbi in its Special Drawing Rights (SDR) reserve currency basket, and the implications for China, the IMF, and the future of global currencies. The event featured Dr. Yu Yongding, an academic in macroeconomics, international finance, and global economics, at the Chinese Academy of Social Sciences (CASS), and Dr. Warren Coats, an economist specializing in monetary policy and a former chief of the SDR division at the IMF. Bretton Woods Committee Executive Director, Randy Rodgers, moderated the discussion.
Yu began the discussion focusing on the implications for China. In his opinion, there are no real short-term impacts of the inclusion of the renminbi into the SDR. However, he views the inclusion as an important step for China’s progress toward economic reforms and as an entry point for promoting capital account liberalization in China.
Yu described the challenges that China and its central bank – the People’s Bank of China (PPOC) – faces in regards to its exchange rate policy, in particular the recent market volatility characterized by large capital outflows. He reflected on the inconsistency of PBOC guidance and tactics, including the crawling currency peg which the PBOC has tried to defend to stabilize the renminbi despite heavy downward pressure on it. He noted that the cost of intervention has been high, with China running a capital account deficit since 2014 and slowly burning through its reserves. Many worry that this cannot be maintained – some argue that the PBOC should allow the renminbi to fall further (10-20%) while others worry about market panic and unpredictability should such a devaluation occur. Yu recommended a policy mix where the PBOC allows the renminbi to float freely or pegs it to a global basket of currencies rather than solely to the U.S. Dollar.
Coats agreed that the inclusion of the renminbi in the SDR is more important politically than it is economically. In his view, the process of inclusion did promote important fiscal reforms in China by pushing the PBOC to implement measures to make the renminbi freely usable, a requirement to be included in the SDR. Coats then provided some background on the historical significance behind the creation of the SDR. Initially, the SDR was created to supplement the dollar as an international reserve. The use of the dollar as the primary global reserve currency carries both an economic burden and benefit for the United States, and essentially forces the United States to run a balance of payments deficit in order to supply dollars to the rest of the world. In this respect – the SDR as a supplement to international reserves – has failed to an extent because the political will has never existed to promote SDRs as a reserve asset.
If the political will does exist in the future, then Coats argues that the SDR could become the primary global reserve currency. One impediment that would have to be overcome structurally, however, is the way in which the SDR was created and the allocation mechanism that keeps the SDR inside the IMF as a unit of account and not freely usable in global markets. Instead, Coats proposes that the current SDR allocation mechanism be replaced so that they are issued by a Currency Board and can be used as a transaction currency in various markets (i.e. commodity markets). In Coats’ view this is the key to getting the SDR outside of the IMF, in order to promote its broader usage and to position the SDR as the primary global reserve currency.