Posts tagged: IMF

Global debt at all-time high of $152 trillion

The world is awash with $152 trillion dollars of debt, according to the IMF, an all-time high which sits at more than double the balance at the start of this century. This debt mountain, as of 2015, represents 225 percent of gross domestic product (GDP), up from 200 percent in 2002 and signifies the extent to which increases in borrowing have outpaced economic growth during the period. While the Washington D.C.-based organization emphasized that there is no exact science to knowing how much debt is too much, it has urged governments in certain countries to tackle excessive private debt levels.

 

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The Changes in SDR Weights After China’s Yuan Joined IMF Currency Basket

September 30, 2016

In the most recently concluded review (November 2015), the Executive Board decided that the Chinese renminbi (RMB) met the existing criteria for SDR basket inclusion and therefore, effective October 1, 2016, would join the SDR basket, along with the U.S. dollar, euro, Japanese yen, and pound sterling.

The weights of the five currencies in the new SDR basket based on the new formula are listed below:

  • U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
  • Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
  • Chinese renminbi 10.92 percent
  • Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
  • Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)

The Chinese RMB met all conditions and operational requirements for being determined freely usable and to be added in the SDR basket at the time of the Executive Board’s decision on November 30, 2015. It was decided to make the new basket effective October 1, 2016 to allow the Fund and its member’s prepare for operations using the RMB.

The next review of the method of valuation of the SDR will take place by September 30, 2021, unless an earlier review is warranted by developments in the interim.

The Review of the Method of Valuation of the Special Drawing Right (SDR) basket is conducted every five years by the IMF’s Executive Board, or earlier if warranted by developments. The purpose of the review is to ensure that the SDR basket reflects the relative importance of major currencies in the world’s trading and financial systems, with a view to enhancing the SDR’s attractiveness as an international reserve asset. The latest review was completed on November 30, 2015.

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Historical event: IMF gives China’s currency prized reserve asset status

“The International Monetary Fund on Monday admitted China’s yuan into its benchmark currency basket in a victory for Beijing’s campaign for recognition as a global economic power. The IMF executive board’s decision to add the yuan, also known as the renminbi, to the Special Drawing Rights (SDR) basket alongside the dollar, euro, pound sterling and yen, is an important milestone in China’s integration into the global financial system and a nod to the progress it has made with reforms.

To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours. The currency will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR, which determines which currencies countries can receive as part of IMF loans.

The yuan’s inclusion is a largely symbolic move, with few immediate implications for financial markets. But it is the first time an additional currency has been added to the SDR basket and the biggest change in its composition in 35 years. Last set in 2010, the basket is currently 41.9 percent dollar, 37.4 percent euro, 11.3 percent sterling and 9.4 percent yen.

The yuan СNH=CNY would not join until October 2016, allowing reserve managers time to prepare. Under the new formula, the euro’s share will drop to 30.93 percent. Sterling and yen will also have lower weights while the dollar remains about the same.

To be included in the SDR basket, the yuan had to meet the criteria to be “freely usable,” or widely used to make international payments and widely traded in foreign exchange markets – a yardstick it missed at the last review in 2010. The addition is likely to fuel demand for China’s currency and for renminbi-denominated assets as central banks and foreign fund managers adjust their portfolios to reflect the yuan’s new status. Currency analysts estimate the IMF seal of approval could fuel demand worth more than $500 billion in coming years and take the yuan’s share of global reserve holdings to around 5 percent, overtaking the Canadian and Australian dollars.

In a factsheet accompanying the decision, the IMF said that since Chinese interest rates were higher than those of other currencies, it was likely that the SDR interest rate would rise as a result of the yuan’s inclusion. Read more »

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