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6 White Paper on the Business Environment in China
of currencies comprising the SDR has been altered. The change IMF’s decision is a “win-win” for both China and the world and
was agreed by the IMF’s Executive Board following a regular acknowledges China’s achievements in economic development
review of the currencies making up the SDR basket. 13 and reform, the People’s Bank of China, the central bank,
PBOC said in a statement on its website. 15
The SDR is an international reserve asset created by the IMF
in 1969 to supplement its member countries’ official reserves. The IMF staff ’s report to the Executive Board notes that
Since 1999, when the euro replaced the Deutsche mark and since the last SDR review in 2010, whereby, Bloomberg notes,
French franc, its value has been based on a basket of four curren- the yuan was actually rejected as a reserve currency, the use of
cies: the U.S. dollar, the euro, the Japanese yen, and the British the yuan in international payments has risen substantially. In
pound, that met the IMF’s inclusion criteria. The composition addition, yuan trading activity in foreign exchange markets
and valuation of the SDR is typically reviewed every five years covering two of the three major trading time zones has increased
to ensure it reflects the relative importance of currencies in the significantly, and can now accommodate transactions of the
global trading and financial systems. 14 magnitude involved in IMF operations. 15
It should be noted that inclusion in the SDR is very different The Wall Street Journal notes that the inclusion puts new
from increasing China’s share in the IMF quota – an issue pressure on Beijing to change everything from how it manages
which had long been pending in the US Congress and which, the yuan to how it communicates with investors and the world.
Bloomberg reports, was finally approved by both Houses China’s pledges to loosen its tight grip on the currency’s value and
and signed by President Obama in mid-December 2015. In open its financial system will come under new scrutiny. Inclusion
a sign that IMF governance now provides more of a voice to would also put pressure on the central bank to offer the same
emerging markets, China jumped to become the third-biggest degree of clarity and transparency that the U.S. Federal Reserve,
IMF shareholder under the new IMF quota. The IMF’s quota the European Central Bank and other vital institutions strive for.
represents the member country’s voice in the decision-making
at the IMF and is closely linked to the country’s influence over Implications for China Reforms
the IMF. 22
Wharton management professor Minyuan Zhao observes
IMF Managing Director Christine Lagarde said: “The Exec- that the longer-term impact of the yuan inclusion as a reserve
utive Board’s decision to include the RMB in the SDR basket is currency will depend on how China uses the opportunity, say-
an important milestone in the integration of the Chinese econ- ing “Whether it is a positive or a negative in the long run de-
omy into the global financial system. It is also a recognition of pends on how China acts. Will it take it as incentive to bring in
the progress that the Chinese authorities have made in the past transparency and reform the financial system?” 18
years in reforming China’s monetary and financial systems. The
continuation and deepening of these efforts will bring about For China, the move is a validation of efforts over the past
a more robust international monetary and financial system, few years to liberalize financial markets and free up flows of
which, in turn will support the growth and stability of China funds into and out of China’s capital markets. In this regard,
and the global economy.” 13 the IMF’s decision could strengthen the credibility of Beijing’s
economic reformers against more conservative elements in the
The most recent review by the IMF’s Executive Board con- Xi Jinping administration.
cluded that China and its currency met the two criteria for in-
clusion in the basket: that the issuing country is among the larg- Caixin analyzed what the decision means for the future of
est exporters in the world and that its currency is “freely usable.” reform in China. Data from the IMF show that only 38 central
A currency is determined to be freely usable when it is widely banks have yuan-dominated holdings that total RMB 780
used to make payments for international transactions and wide- billion, or 1.1% of total foreign reserves held by central banks
ly traded in the principal exchange markets. 13 around the world (versus 64% for the U.S. dollar and 21% for the
euro). Analysts around the world say many global investment
The IMF Executive Board’s determination that the RMB is institutions will “quickly respond” to the IMF’s decision
freely usable and its decision to include the RMB in the SDR and put yuan-denominated holdings in their portfolios, and
basket both take effect on October 1, 2016.The review also ac- Standard Chartered Bank estimated that nearly USD 1 trillion
knowledged recent steps taken by the Chinese authorities to will be invested in China’s bond market by the end of 2020. 19
grant full access for official reserve managers and their agents to
the onshore fixed-income and foreign exchange markets, as well However, many debate on the future of the currency’s
as steps to enhance data disclosure.13 international status, with a consensus emerging that this
depends on the development of financial markets in China and
The decision to include the yuan in the makeup of the progress in reforming the exchange and interest rate regimes:
SDR basket reflects major shifts in the global economy, and is Without financial reforms and further opening up, one analyst
a recognition of China’s progress over the last few decades in from Goldman Sachs said China’s efforts to push for greater
moving toward a more open and market-based economy. The adoption of the yuan in international payments and trade
56
of currencies comprising the SDR has been altered. The change IMF’s decision is a “win-win” for both China and the world and
was agreed by the IMF’s Executive Board following a regular acknowledges China’s achievements in economic development
review of the currencies making up the SDR basket. 13 and reform, the People’s Bank of China, the central bank,
PBOC said in a statement on its website. 15
The SDR is an international reserve asset created by the IMF
in 1969 to supplement its member countries’ official reserves. The IMF staff ’s report to the Executive Board notes that
Since 1999, when the euro replaced the Deutsche mark and since the last SDR review in 2010, whereby, Bloomberg notes,
French franc, its value has been based on a basket of four curren- the yuan was actually rejected as a reserve currency, the use of
cies: the U.S. dollar, the euro, the Japanese yen, and the British the yuan in international payments has risen substantially. In
pound, that met the IMF’s inclusion criteria. The composition addition, yuan trading activity in foreign exchange markets
and valuation of the SDR is typically reviewed every five years covering two of the three major trading time zones has increased
to ensure it reflects the relative importance of currencies in the significantly, and can now accommodate transactions of the
global trading and financial systems. 14 magnitude involved in IMF operations. 15
It should be noted that inclusion in the SDR is very different The Wall Street Journal notes that the inclusion puts new
from increasing China’s share in the IMF quota – an issue pressure on Beijing to change everything from how it manages
which had long been pending in the US Congress and which, the yuan to how it communicates with investors and the world.
Bloomberg reports, was finally approved by both Houses China’s pledges to loosen its tight grip on the currency’s value and
and signed by President Obama in mid-December 2015. In open its financial system will come under new scrutiny. Inclusion
a sign that IMF governance now provides more of a voice to would also put pressure on the central bank to offer the same
emerging markets, China jumped to become the third-biggest degree of clarity and transparency that the U.S. Federal Reserve,
IMF shareholder under the new IMF quota. The IMF’s quota the European Central Bank and other vital institutions strive for.
represents the member country’s voice in the decision-making
at the IMF and is closely linked to the country’s influence over Implications for China Reforms
the IMF. 22
Wharton management professor Minyuan Zhao observes
IMF Managing Director Christine Lagarde said: “The Exec- that the longer-term impact of the yuan inclusion as a reserve
utive Board’s decision to include the RMB in the SDR basket is currency will depend on how China uses the opportunity, say-
an important milestone in the integration of the Chinese econ- ing “Whether it is a positive or a negative in the long run de-
omy into the global financial system. It is also a recognition of pends on how China acts. Will it take it as incentive to bring in
the progress that the Chinese authorities have made in the past transparency and reform the financial system?” 18
years in reforming China’s monetary and financial systems. The
continuation and deepening of these efforts will bring about For China, the move is a validation of efforts over the past
a more robust international monetary and financial system, few years to liberalize financial markets and free up flows of
which, in turn will support the growth and stability of China funds into and out of China’s capital markets. In this regard,
and the global economy.” 13 the IMF’s decision could strengthen the credibility of Beijing’s
economic reformers against more conservative elements in the
The most recent review by the IMF’s Executive Board con- Xi Jinping administration.
cluded that China and its currency met the two criteria for in-
clusion in the basket: that the issuing country is among the larg- Caixin analyzed what the decision means for the future of
est exporters in the world and that its currency is “freely usable.” reform in China. Data from the IMF show that only 38 central
A currency is determined to be freely usable when it is widely banks have yuan-dominated holdings that total RMB 780
used to make payments for international transactions and wide- billion, or 1.1% of total foreign reserves held by central banks
ly traded in the principal exchange markets. 13 around the world (versus 64% for the U.S. dollar and 21% for the
euro). Analysts around the world say many global investment
The IMF Executive Board’s determination that the RMB is institutions will “quickly respond” to the IMF’s decision
freely usable and its decision to include the RMB in the SDR and put yuan-denominated holdings in their portfolios, and
basket both take effect on October 1, 2016.The review also ac- Standard Chartered Bank estimated that nearly USD 1 trillion
knowledged recent steps taken by the Chinese authorities to will be invested in China’s bond market by the end of 2020. 19
grant full access for official reserve managers and their agents to
the onshore fixed-income and foreign exchange markets, as well However, many debate on the future of the currency’s
as steps to enhance data disclosure.13 international status, with a consensus emerging that this
depends on the development of financial markets in China and
The decision to include the yuan in the makeup of the progress in reforming the exchange and interest rate regimes:
SDR basket reflects major shifts in the global economy, and is Without financial reforms and further opening up, one analyst
a recognition of China’s progress over the last few decades in from Goldman Sachs said China’s efforts to push for greater
moving toward a more open and market-based economy. The adoption of the yuan in international payments and trade
56
