The role of special drawing rights (SDRs)

Julie Brownlee, Fsp Invest, 15 Sep. 2015

Tags: sdrs, special drawing rights, what are special drawing rights, china sdrs, yuan and sdrs

Recently, you may have come across stories in the financial press about China’s wish to have its currency included in special drawing rights (SDRs).

SDRs are international reserve assets brought in by the International Monetary Fund (IMF).

So what is the role of SDRs? And why does China’s want the yuan included?

Read on to find out…

The purpose of SDRs

The IMF introduced SDRs as a supplement to the currency reserves of its member countries. SDRs aren’t a currency, nor are they a claim on the IMF.

As the IMF states, SDRs are a potential claim on the freely usable currencies of IMF member countries.

The key role of SDRs is to allow member countries to swap their own currencies for SDRs if they’re running out of foreign currency reserves.

If this happens, the IMF can designate countries that have strong currencies to buy SDRs from the country in need of help or member countries can arrange it between themselves.

At the moment, four currencies form the basis of the value of SDRs:

  • The dollar (41.9%);
  • The euro (37.4%);
  • The pound (11.3%); and
  • The yen (9.4%).

Why China wants the yuan included in SDRs

China wants the yuan included so the currency has “equal billing with the euro, yen, pound and dollar,” reports Reuters. For the IMF to include the yuan, it needs to decide whether the Chinese currency is “freely usable or widely used to make international payments and widely trading in foreign exchange markets”.

There is a chance the yuan will join the four currencies in the current SDR basket later in the year. Time will tell what the IMF decides.

So there you have it. The role of SDRs.

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