Page 72 - 2017 White Paper
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7 White Paper on the Business Environment in China
part of the SDR basket at the IMF is quite a ways away weighting of the other currencies in the basket is 41.73%
from being a global reserve currency.” (Taplin et al. 2016) (USD), 30.93% (EUR), 8.33% (JPY) and 8.09% (GBP). This
is the first time in over 15 years that the list of currencies
Although the yuan has been determined by the comprising the SDR has been altered. The change was
IMF in a September 30, 2016 statement to be “a freely agreed by the IMF’s Executive Board following a review
usable currency”, critics still argue, Fortune reports, that of the currencies making up the SDR basket (IMF Survey
the move is “largely symbolic” and that the yuan does 2015a).
not “fully meet” IMF reserve currency criteria. Critics
have pointed out that the yuan is “not widely traded” The SDR is an international reserve asset created by
in financial markets due to strict capital controls still in the IMF in 1969 to supplement its member countries’
place (Taplin et al. 2016). official reserves. Since 1999, when the euro replaced
the Deutsche mark and French franc, its value has been
Moreover, according to a Bloomberg report, after a based on a basket of four currencies: the U.S. dollar,
sudden devaluation of the yuan in August 2015 spooked the euro, the Japanese yen, and the British pound, that
global financial markets, China was perceived to be met the IMF’s inclusion criteria. The composition and
“meddling heavily” in the financial exchange market, its valuation of the SDR is typically reviewed every five years
intervention felt even in Hong Kong where the yuan’s to ensure it reflects the relative importance of currencies
interchange rates were driven up to 20 percent. The in the global trading and financial systems (IMF Survey
report said that these pessimists also cast doubt on 2015a).
China’s commitment to pursue economic reforms and to
further opening up (Ganguly 2016). It should be noted that inclusion in the SDR is very
different from increasing China’s share in the IMF quota
Still, a somewhat cynical opinion piece in the – an issue which had long been pending in the US
South China Morning Post has declared that in order to Congress and which, Bloomberg reports, was finally
become a SDR member, it is imperative that China end approved by both Houses and signed by President
its heavy-handed management of the yuan’s exchange Obama in mid-December 2015. In a sign that IMF
rate against the U.S. dollar and allow greater freedom governance now provides more of a voice to emerging
and flexibility for its currency to move in international markets, China jumped to become the third-biggest IMF
markets. Moreover, the Post piece states that to manage shareholder under the new IMF quota. The IMF’s quota
the stability of its domestic financial system in “an represents the member country’s voice in the decision-
environment of freer capital flows and greater exchange making at the IMF and is closely linked to the country’s
rate volatility”, China would “have to complete the influence over the IMF (Mayeda 2015a).
overhaul of its domestic monetary system”, moving away
from its centrally-mandated model of capital allocation IMF Managing Director Christine Lagarde said: “The
and towards one responding according to market forces Executive Board’s decision to include the RMB in the SDR
(Holland 2016). basket is an important milestone in the integration of
the Chinese economy into the global financial system.
Based on this rationale, one can confidently conclude It is also a recognition of the progress that the Chinese
that the SDR inclusion can only mean that China intends authorities have made in the past years in reforming
to live up to its earlier pronounced promises of further China’s monetary and financial systems. The continuation
opening up and pursuing of deeper financial and and deepening of these efforts will bring about a more
economic reforms. robust international monetary and financial system,
which, in turn will support the growth and stability of
Background China and the global economy” (IMF Survey 2015b).
On November 30, 2015, the IMF announced that The most recent review by the IMF’s Executive
China’s currency, the yuan, is to be included in the Board concluded that China and its currency met the
basket of currencies which make up the IMF’s Special two criteria for inclusion in the basket: that the issuing
Drawing Right, or SDR. On October 1st, 2016, the IMF will country is among the largest exporters in the world
then add the yuan to its SDR basket with a weighting of and that its currency is “freely usable”. A currency is
10.92%, as the currency has “met all existing criteria”. The determined to be freely usable when it is widely used to
72
part of the SDR basket at the IMF is quite a ways away weighting of the other currencies in the basket is 41.73%
from being a global reserve currency.” (Taplin et al. 2016) (USD), 30.93% (EUR), 8.33% (JPY) and 8.09% (GBP). This
is the first time in over 15 years that the list of currencies
Although the yuan has been determined by the comprising the SDR has been altered. The change was
IMF in a September 30, 2016 statement to be “a freely agreed by the IMF’s Executive Board following a review
usable currency”, critics still argue, Fortune reports, that of the currencies making up the SDR basket (IMF Survey
the move is “largely symbolic” and that the yuan does 2015a).
not “fully meet” IMF reserve currency criteria. Critics
have pointed out that the yuan is “not widely traded” The SDR is an international reserve asset created by
in financial markets due to strict capital controls still in the IMF in 1969 to supplement its member countries’
place (Taplin et al. 2016). official reserves. Since 1999, when the euro replaced
the Deutsche mark and French franc, its value has been
Moreover, according to a Bloomberg report, after a based on a basket of four currencies: the U.S. dollar,
sudden devaluation of the yuan in August 2015 spooked the euro, the Japanese yen, and the British pound, that
global financial markets, China was perceived to be met the IMF’s inclusion criteria. The composition and
“meddling heavily” in the financial exchange market, its valuation of the SDR is typically reviewed every five years
intervention felt even in Hong Kong where the yuan’s to ensure it reflects the relative importance of currencies
interchange rates were driven up to 20 percent. The in the global trading and financial systems (IMF Survey
report said that these pessimists also cast doubt on 2015a).
China’s commitment to pursue economic reforms and to
further opening up (Ganguly 2016). It should be noted that inclusion in the SDR is very
different from increasing China’s share in the IMF quota
Still, a somewhat cynical opinion piece in the – an issue which had long been pending in the US
South China Morning Post has declared that in order to Congress and which, Bloomberg reports, was finally
become a SDR member, it is imperative that China end approved by both Houses and signed by President
its heavy-handed management of the yuan’s exchange Obama in mid-December 2015. In a sign that IMF
rate against the U.S. dollar and allow greater freedom governance now provides more of a voice to emerging
and flexibility for its currency to move in international markets, China jumped to become the third-biggest IMF
markets. Moreover, the Post piece states that to manage shareholder under the new IMF quota. The IMF’s quota
the stability of its domestic financial system in “an represents the member country’s voice in the decision-
environment of freer capital flows and greater exchange making at the IMF and is closely linked to the country’s
rate volatility”, China would “have to complete the influence over the IMF (Mayeda 2015a).
overhaul of its domestic monetary system”, moving away
from its centrally-mandated model of capital allocation IMF Managing Director Christine Lagarde said: “The
and towards one responding according to market forces Executive Board’s decision to include the RMB in the SDR
(Holland 2016). basket is an important milestone in the integration of
the Chinese economy into the global financial system.
Based on this rationale, one can confidently conclude It is also a recognition of the progress that the Chinese
that the SDR inclusion can only mean that China intends authorities have made in the past years in reforming
to live up to its earlier pronounced promises of further China’s monetary and financial systems. The continuation
opening up and pursuing of deeper financial and and deepening of these efforts will bring about a more
economic reforms. robust international monetary and financial system,
which, in turn will support the growth and stability of
Background China and the global economy” (IMF Survey 2015b).
On November 30, 2015, the IMF announced that The most recent review by the IMF’s Executive
China’s currency, the yuan, is to be included in the Board concluded that China and its currency met the
basket of currencies which make up the IMF’s Special two criteria for inclusion in the basket: that the issuing
Drawing Right, or SDR. On October 1st, 2016, the IMF will country is among the largest exporters in the world
then add the yuan to its SDR basket with a weighting of and that its currency is “freely usable”. A currency is
10.92%, as the currency has “met all existing criteria”. The determined to be freely usable when it is widely used to
72
