On November 30, 2015, the International Monetary Fund (IMF) announced that Chinese Renminbi will be the fifth currency in the Special Drawing Rights basket (SDR), following the U.S. dollar, Euro, UK Pound and Japanese Yen. The change will be effective on October 1, 2016.
After reweighing the relative composition, the U.S. dollar will carry a weight of 41.73%, the Euro 30.93%, the Chinese Renminbi 10.92%, the Yen 8.33%, and the British Pound 8.09%. While the U.S. dollar maintain dominate position, the 3rd position of Chinese Renminbi showed that reorganization of the importance of China market from IMF.
Since the electronic component market is so immense, any fluctuation with the Chinese Renminbi will impact the market. With the Chinese Renminbi admitted into the SDR, it is crucial to take a look at such effect.
SDR is supplementary foreign exchange reserve assets defined and maintained by the IMF. Technically, they help maintain the balance between IMF member countries with big external liabilities and those flush with exponential cash assets. Member countries of IMF are allocated with certain amounts of SDR and they can choose to exchange currencies. Additionally, some international organizations also use SDR as their account unit.
In reality, SDR plays a fairly marginal role in the international financial system, due to the fact that most countries largely rely on capital markets and hard currencies to cover their obligations. Which is also why for years, SDR has rarely made to the headlines.
One of the criteria for a currency to be in the SDR is that the currency has to be “freely usable”. To be included in the SDR, China, known to be tight on exchange rate for its currency, has made a lot of changes in its central bank system to meet such requirement. The changes includes setting an offshore RMB trade center in London, launching a cross-border China International Payments System (CIPS) and extending trading hours to 11:30pm Beijing time, to work better with global trade market. China officials have expressed that their goal is to have RMB be a market-driven currency and freely usable in multiple occasions. Joining SDR is just one step in this long process.
As we discussed in our previous blog, the exchange rate of the Chinese Renminbi probably has the biggest impact on the electronic component market. Although the central bank of China still has the power to intervene the currency exchange, the fluctuation of RMB will become wider and quicker due to the market impact. When this happens, the price to export and import electronic components, which are often traded with the U.S. dollar, will react accordingly. For EMS, the change of pricing could mean financial challenges, as it is hard to strategically plan resources accordingly. On the other hand, joining SDR means that RMB could be used in international trading with no exchange and bank fee. Therefore, we might see more and more factories use RMB to buy and sell electronic components in the future.
Being a reliable and trusted partner in the global electronic industry, Advanced MP Technology understands the impact of global financial situations on our customers. That is why we keep close eye on the fast changing environment, to allocate our services and resources accordingly to fit our customers’ need in any market condition.