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6 White Paper on the Business Environment in China

would backfire because the currency would be exposed to more also encourage China to accelerate its financial sector reforms –
risks. Caixin reports that policy head Zhou Chengjun at the a move which would be welcomed by foreign investors.
People’s Bank of China said the decision simultaneously marks
the recognition of the yuan as an international currency, “but
it also means China is obliged to align its financial system with
international standards via further reforms of the financial
market and greater opening up.”

Xinhua reports that on December 3, 2015, China’s Cabinet,
the State Council, publicly welcomed the IMF decision to
include the yuan in its Special Drawing Rights basket, dubbing
it “an opportunity for further financial reform and opening-
up.” In an executive meeting of the State Council presided over
by Premier Li Keqiang, the cabinet reiterated that China will
stick to a managed, floating exchange rate mechanism, keep the
currency stable at a reasonable level and make it convertible
under the capital account “in an orderly manner.” In a released
statement, the council called the IMF’s decision a “recognition
of China’s reform and opening-up achievements, and will enable
China to be more engaged in global economic governance.” 20

The State Council’s announcement was followed shortly
by a statement from Xing Yujing, director general of the
No. 2 monetary policy department of the People’s Bank of
China who said the inclusion of the yuan into the IMF global
reserve currencies basket is the starting point for deeper financial
reforms, which include a greater liberalization of its capital
account. She said the yuan’s admission into the IMF’s Special
Drawing Rights basket would help improve price discoverability
for the currency. However, she noted that the yuan lagged
behind other major currencies in terms of convertibility on the
capital account and that China still needed to further open up
its financial markets . 21

While the yuan is already convertible under China’s current
account, the broadest measure of trade in goods and services,
the capital account, which covers portfolio investment and
borrowing, is still subject to restrictions as Beijing worries about
abrupt capital flight and hot-money inflows.

US and Global Market Implications

Experts say that even though President Xi Jinping may have
been quoted in mid-November 2015 as saying that the yuan’s
new status “will improve the international monetary system and
safeguard global financial stability”16, the IMF decision may have
limited market impact in a world dominated by the U.S. dollar.

Still, though largely perceived as a symbolic reflection of
China’s rising economic power, the decision may have a bigger
geopolitical impact in providing China a voice in internation-
al monetary decisions; in possibly enabling China to create a
money transfer system to compete with the widely used “Swift”
system; and in likely limiting the dollar’s use in enforcing po-
litical sanctions. Most importantly, the yuan’s new status could

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