WASHINGTON — The People’s Bank of China (PBOC), China’s central bank, could play a role in promoting the wider use of Special Drawing Rights (SDR), said Yi Gang, deputy governor of the PBOC, on April 21.
The use of SDR as a unit of account, financial instruments and official reserves has shown progress since the Chinese currency, the Renminbi, joined the SDR basket last year, said Yi at a forum during the International Monetary Fund (IMF) and World Bank Spring Meetings.
According to the deputy governor, China has started reporting foreign reserves and international balance of payment data in SDR; and the World Bank and Standard Chartered have successfully issued SDR bonds in China.
However, Yi pointed out that the infrastructure for the SDR market needs improvement because the market still lacks liquidity, and the costs for hedging and settlements remain high.
In order to promote SDR market liquidity, Yi suggested that market institutions could increase the use of SDR as an accounting unit, which could encourage their participation in the SDR market and inject more liquidity into the market.
Mohamed El-Erian, chief economic advisor for Allianz, at the same forum also suggested that multilateral banks, sovereign wealth funds and multinational companies could be potential players in the SDR market.
In terms of official SDR reserves, Yi said that the IMF has played an important role in SDR allocation, while other central banks of countries that issue the reserve currency could also play a role in facilitating other SDR reserve holders to convert their SDR assets into other reserve currency assets. In this regard, China’s central bank could also play a role, said Yi.
The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. It can be exchanged among governments for freely usable currencies in times of need.
Last year, the IMF decided to include the RMB in the SDR basket as a fifth currency. It’s the first time for the IMF to include a currency from an emerging market economy in its SDR basket.
It is an acknowledgement of the progress China has made to get integrated into a global financial system dominated for decades by advanced economies, marking a historic milestone for China, the IMF and the international monetary system.