What Are Special Drawing Rights?

Special Drawing Right (SDR), also known as "Paper Gold", was first issued in 1969. It is allocated by the International Monetary Fund based on the shares subscribed by Member States and can be used to repay the International Monetary Fund. A book asset that organizes debt and makes up the balance of payments between governments of member states. Its value is currently determined by a basket of reserve currencies consisting of the US dollar, euro, renminbi, yen and pound. In the event of a balance of payments deficit, Member States can use it to exchange foreign exchange with other member states designated by the IMF to pay the balance of payments deficit or repay IMF loans. They can also serve as international reserves in the same way as gold and freely convertible currencies. Because it is a supplement to the IMF's original ordinary drawing rights, it is called a special drawing right.

Special Drawing Right

In 1970, the tightening monetary policy of the United States made liquidity of foreign exchange reserves worldwide scarce. In order to make up for the shortage of US dollar reserve assets, on January 1, 1970, the IMF issued 3 billion SDRs to its member countries for the first time. Subsequent allocations of 3 billion SDRs continued in 1971 and 1972. After three years of distribution, SDR accounted for 9.5% of world non-gold reserve assets.

However, in 1971, the stagnant economic growth in the United States forced the Fed to adopt a loose stance, releasing a lot of liquidity to the world like a wild horse. This changed monetary policy stance no longer matches the fixed exchange rate system under the gold standard: the "currency anchor" of the US dollar is too weak. President Nixon announced that the value of the dollar was decoupled from gold.

By 1973, the fixed exchange rates of most other major currencies against the US dollar had been abandoned, and the Bretton Woods system had disintegrated. When the IMF discusses whether it is necessary to continue to increase the allocation of SDR, considering that the US balance of payments has increased the global reserve currency, the function of SDR as a supplementary reserve asset is no longer so important and it is decided not to increase SDR.

At the same time, as the fixed exchange rate system was broken, the SDR began to be linked to a basket of currencies, initially 16 currencies, and later changed to the five currencies of the United States, Britain, Germany, France, Italy and Italy. The yen was included in the SDR basket in 1980. After the emergence of the euro in 1999, it replaced the currencies of the three continental European countries and together with the dollar, the pound, and the yen formed the currency basket for the first 15 years of the new millennium.

In 1978, the credibility of the US dollar was again questioned: the US Carter government's accommodative monetary policy led to rapid rises in US prices. Oil exporters, including OPEC, have begun to worry about the stability of the US dollar, and Saudi Arabia has even converted some of its surplus funds into Swiss francs and German marks.

On October 30, 1978, the US dollar experienced a panic plunge against major currencies. Many countries are wary of growing dollar-denominated foreign exchange reserves. Major foreign exchange reserve holders have stated that they are unwilling to increase their holdings of US dollar assets. In the following four years, the IMF issued a total of 12 billion units of SDRs.

Fast forward to 2008, when the global financial crisis broke out, the status of the US dollar was once again impacted and questioned. In order to alleviate the tight liquidity of the global financial system, and hope to better reflect their economic status by also distributing SDRs to emerging market countries that have not previously shared SDRs, the IMF created 182.6 billion SDRs in 2009. According to each member Countries' IMF shares are distributed to member states. This is the third round in history and the largest SDR release. The total amount of SDR held by countries around the world reached 204.1 billion.

On August 31, 2016, the official website of the central bank announced that the World Bank (International Bank for Reconstruction and Development) 's first special drawing rights (SDR) -denominated bonds were successfully issued in the Chinese interbank bond market, with an issuance scale of 500 million SDR (about RMB 4.66 billion), the term is 3 years, and the settlement currency is RMB.

According to the International Monetary Fund Agreement, all IMF member states can participate in the special drawing rights

In November 2005, the Executive Board of the IMF made it clear that the constituent currencies of the SDR basket must meet two criteria:

First, the currency basket must be a currency issued by a country participating in the IMF or a currency union. The economy was one of the four largest exporters of goods and services in the world during the first five years of the inspection period one year before the effective date of the basket;

The second is that the currency is the "freely used currency" provided for in Article 30, paragraph f, of the Fund Agreement.

There are two recognition requirements for free use of currency: first, it is widely used in international transactions, including the country s share of IMF participating countries exports, and the amount of assets denominated in that currency as official reserve assets; and second, in major foreign exchange markets A wide range of transactions, including indicators of foreign exchange transaction volume, the existence of a forward foreign exchange market, and the purchase price spread of foreign exchange transactions denominated in that currency. The inclusion of SDR baskets requires no less than 70% of IMF member countries to vote for it.

According to the Fund Agreement and IMF resolutions, special drawing rights are currently available for the following purposes:

(1) In accordance with Article 19, paragraph 3, of the Fund Agreement, participating countries may, based on the needs of balance of payments or reserve status, apply to the IMF to arrange for conversion to other participating countries under the SDR account to be freely convertible. Foreign exchange used; after receiving the application, the IMF can coordinate the designation of certain participating countries (good balance of payments and strong international reserve status) as the object of accepting special drawing rights, and exchange with the applicant country within the prescribed period ; There is no proportional limit on such exchange in the applicant country, and all special drawing rights held by the applicant country can be converted into freely usable foreign exchange.

(2) Pursuant to Article 19, paragraph 2 (b); of the Fund Agreement, a participating country may also convert special drawing rights into other currencies of equivalent value by reaching an agreement with other participating countries ( (Including foreign exchange that is not free to use), without the need to obtain approval from the fund, and not to follow the relevant rules and principles of the fund (including restrictions on the "need" of foreign exchange exchange); however, such transactions do not violate the Fund Agreement The principle stipulated in this article shall prevail (change the structure of international reserves).

(3) Pursuant to Article 17, paragraph 2 of the Fund Agreement, a participating country may apply to transfer its special drawing rights held under a special drawing rights account to a general resource account to supplement the participating country s general Debts generated by the reserves under the resource account less than 25% of its quota, or used to repay other debts owed to the fund (such as debts owed in accordance with Article 5, paragraph 6, of the Fund Agreement); Special Drawing Rights Department of the Fund After receiving the application from the applicant country, it is actually necessary to convert the special drawing right to other participating countries into the required currency and transfer it to the general source account of the applicant country. Therefore, the fund must obtain relevant Against the consent of the foreign exchange country.

(4) According to the current resolution of the IMF, the special drawing rights are aggregated to represent the currencies of five freely usable currencies (referred to as "special drawing rights baskets") in an adjustable proportion, and their currency values are relatively stable. , Can be used as a currency valuation unit.

(5) According to Article 30 of the Fund Agreement, as long as it is approved by the IMF, special drawing rights can also be used for other related financial services between fund member countries and non-member countries. From the existing resolutions and current practice of the IMF, special drawing rights have been used between member and non-member countries for forward trade payments, specific loans, international financial settlements, international financial business deposits, and fund interest. And bonus payments, grants, and more.

Finally, as a relatively stable international reserve asset and a monetary denomination, the IMF can change the SDR at any time in accordance with the authorization of Article 15 (2) of the Fund Agreement. (SDR) pricing methods and principles. The special drawing right was directly linked to gold when it was created (ISDR value is 0.888671 grams of gold), and after the second revision of the Fund Agreement, it was linked to the currencies of the sixteen countries; according to No. 6631 adopted by the Fund's Executive Council in 1980 Resolution and Resolution 6708, Special Drawing Rights will be composed of the currencies of the five member countries of the Fund with the highest international export trade and service trade from January 1, 1986. Once adjusted, the currencies of the five countries have been designated as freely usable currencies. According to the special drawing right currency basket effective January 1, 1986, the special drawing right set represents the value of the five currencies of the US dollar, mark, franc, yen, and pound, that is, the special drawing right basket.

The SDR uses a valuation method of a basket of currencies. The currency basket is reviewed every five years to ensure that the currencies in the basket are representative currencies used in international transactions, and the weight of each currency reflects its importance in the international trade and financial system. With the conclusion of the review of the special drawing rights valuation rules on October 11, 2000, the Executive Board of the International Monetary Fund agreed to modify the method of determining the special drawing rights and determine the special drawing rights rate, and in 2001 Effective January 1, The selection method of the currency basket and the modification of the weight of each currency is to consider the introduction of the euro, because the euro is the common currency of many European countries and its role in the international financial market is becoming increasingly important. The current currency selection criteria for member countries are based on the largest exports of goods and services, which extend to the export of monetary unions that include members of the International Monetary Fund, and the export value between members of the monetary union is proposed. The second selection criterion introduced was to ensure that the currency selected for the SDR currency basket was the most widely used currency in international trade. According to this regulation, the International Monetary Fund must find "freely usable" currencies, that is, currencies that are commonly used for payment in international transactions and widely traded in major foreign exchange markets.

The proportion of each currency in the SDR currency basket is based on two factors:

(1) Exports of goods and services by Member States or Monetary Unions;

(2) The amount of reserve assets held by each member's currency by other members of the International Monetary Fund. The International Monetary Fund has determined that four currencies (USD, Euro, Japanese Yen, and British Pound) meet the above two criteria and have used them as basket currencies for special drawing weights for 2001-2005. These currencies are weighted according to their position in international trade and finance. As the RMB is added to the SDR currency basket, the US dollar value of the special drawing right is increased daily based on the noon exchange rate in the London market by adding the four currencies plus the RMB exchange rate. The SDR valuation is posted on the IMF's website.

SDRs are not a tangible currency, they are invisible and invisible, but only a book asset.

A basket of currencies is a compound currency that combines the existing set of currencies according to a certain method. A basket of currencies is not a realistic currency, it is just a unit of account and a standard of valuation. It is used by some countries

The SDR interest rate is adjusted once a week, and the base is the weighted average of representative short-term debt interest rates in the currency market of the currency-issuing country in the SDR valuation basket.

In the early days of the creation of SDRs, its value was determined by the amount of gold. At that time, 35 SDR units were equivalent to 1 ounce of gold, which is equivalent to the US dollar.

On December 18, 1971, the U.S. dollar depreciated for the first time, and the SDR's gold content remained unchanged, so one SDR rose to 1.08571 US dollars.

On February 12, 1973, the US dollar depreciated for the second time, and the amount of SDR gold remained unchanged. One SDR rose to 1.20635 US dollars.

In 1973, the currencies of major western countries were decoupled from the US dollar. After the implementation of the floating exchange rate, the exchange rate continued to change, and the ratio of the special drawing right to the US dollar was still fixed at the level of 1.20635 dollars per unit. The exchange rate is calculated at the exchange rate of the US dollar against other currencies. The special drawing right has completely lost its independence and caused dissatisfaction in many countries. The 20-nation committee advocated the use of a basket of currencies as the valuation standard for SDRs. In July 1974, the IMF officially announced that the SDR was decoupled from gold and used 16 currencies in a "basket" as the valuation standard. These 16 currencies include

The creation of SDRs is achieved through a distribution process. Includes two assignments:

The signal of the successful RMB entry into the basket is of great significance, indicating that China's status as a great power is recognized by the international community, which will greatly enhance the confidence of domestic and foreign investors and promote a new round of rise in A shares, which is beneficial to finance, real estate, and the region. All the way to other industries and sectors. Some analysts have pointed out more clearly that joining the SDR will undoubtedly promote the internationalization of the renminbi, and the best sectors in this regard are the renminbi cross-border settlement banks, international business and logistics companies.

However, there are also opinions that the symbolic significance of the yuan's basket is greater than the actual significance. SDR will not immediately increase the demand for the RMB as a reserve asset. Rationally speaking, the internationalization of the RMB has achieved success, but it has only just begun and the long road ahead is long. In the short term, face is bigger than lizi, and emotions are dominant.

Joining the SDR will not be a determining factor in the pricing of China's stock and bond markets. China's asset prices still depend on economic and financial fundamentals. It is also felt that the RMB basket is indeed a good thing. It is an important milestone on the road of RMB internationalization. It may also promote the inclusion of a shares in the msci emerging market index and bring more liquidity to the a share market. But for investors, it is kingly to find down-to-earth fundamental targets.

For ordinary people, the direct impact of RMB entering the basket is relatively small. But in the long run, people's lives may change.