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The RMB and SDR: It's the report, stupid

By Mark Baker
06 Aug 2015

The International Monetary Fund (IMF) has not announced any delay to its decision on whether to include the renminbi in its Special Drawing Rights (SDR) facility. Is that clear enough for everyone?

Trawling through Wednesday's flurry of headlines and analyst reports proclaiming that the IMF was delaying its decision on renminbi inclusion in the SDR, you might have been tempted to conclude that the IMF had just announced it was delaying its decision on renminbi inclusion in the SDR.

It hadn't.

You'd be forgiven for thinking so, of course, given lines like "IMF policy paper proposes the delay of this year's Special Drawing Rights assessment to Sep 2016", which led the summary of one bank's analysis.

RMB SDR review small block 350pxIt is an indication of just how closely followed the SDR issue is right now that there has been such a bizarre collective leap to the wrong conclusion. It is also perhaps a telling reminder of how information circulates in financial markets: all too often there is a striking lack of consultation of first-hand material in favour of chat.

Given the confusion, a quick outline of what the report actually said is called for. The IMF said that there was lots and lots more work to be done before it could reach a decision on whether to include the RMB in the SDR. And it detailed some of its thinking around areas like definitions of "free usability" and the potential difficulties that SDR users might have in hedging positions if the RMB was part of the basket backing the facility.

And now onto timing. It also said that it was proposing a nine-month extension of the current basket until September 30 2016. This was because SDR users had told the IMF that, in the event that the decision was taken to include the RMB in the SDR, it would be difficult to adjust their positions quickly and easily over the New Year period. In fact "many have indicated that a lead time of six to nine months would be desirable in such a case", said the IMF. A decision on whether to adopt this extension will be taken this month.

That's a "lead time" designed to help people adjust to an announced decision. Given the market feedback on how long an adjustment would take, the extension of the existing basket composition creates the conditions that would allow the IMF to announce a positive outcome for the RMB before the end of 2015.

What it is not is a delaying of that decision to September 2016.

In case that wasn't clear enough, the IMF went further. "This proposal […] does not prejudge the timing and outcome of the review."

And there was even more help given by Siddharth Tiwari, director of the IMF's Strategy, Policy and Review Department, in a Q&A that was published by the IMF alongside the report on Tuesday night.

"The Executive Board will formally discuss the review toward the end of the year." "An extension of nine months would […] allow users to adjust to a potential changed basket composition should the Executive Board decide to include the RMB." "The review is well underway. Further work still needs to be undertaken in a number of areas to inform the Executive Board's decision. Staff continues its technical work, including on addressing data gaps and operational issues, while liaising closely with the Chinese authorities and other members ahead of the formal Board meeting expected later in 2015."

The IMF could, of course, not get around to announcing its verdict on the RMB until some time in 2016. But that would be slightly odd: it would not match precedent for its previous reviews, and it would also screw up the "lead time". That would presumably have to be further extended in the event of a positive decision during 2016, since the Fund has specifically said that the length of that extension is a function of how long SDR users think it will take to adjust to a new currency being included.

That kind of delay could still happen. As one IMF official said on a conference call discussing the issue on Tuesday night, "the Board decides when the Board decides". The current Board position is that a decision must be reached by the end of the year, but changing that would simply require another Board decision. However, the call also made clear that the current expectation is indeed for an SDR decision before the end of the year. The Board is scheduled to meet in November to discuss the review.

Finally, the IMF could, of course, announce in 2015 (or 2016) that it was not going to include the RMB at this time. Nothing that was announced on Tuesday changes that. As discussed, the basket extension simply makes a positive outcome easier for markets to manage.

And so back to the original misunderstanding of Tuesday's report. Is it possible that the IMF ends up not announcing its decision on RMB inclusion until 2016? Yes, it's possible. But it didn't say that this week.

Read the report: it's here.

By Mark Baker
06 Aug 2015