Part 4 discuss the RMB's global role and the inclusion of RMB into the Special Drawing Rights (SDR) basket.
RMB'S GLOBAL ROLE
1. China has taken a number of measures to promote the RMB’s use as an international currency, one that is used as a medium of exchange for trade and finance transactions.
2. The RMB has become the fifth-most important payment currency but still accounts for less than 3 percent of worldwide payments for cross-border trade and financial transactions. The RMB also accounts for less than 2 percent of turnover in global foreign exchange markets. The shares of other major emerging markets’ currencies are all below 2 percent.
3. China has set up a new payment system providing a central platform that helps clear interbank financial transactions in a standardized manner both domestically and internationally. The adoption of international standards makes the new payment system a meaningful move in facilitating the international use of the RMB.
4. A stock-taking exercise, based on a traditional set of criteria for a reserve currency, show the progress the RMB has made towards attaining that status as well:
• Economic size: A country’s size and its shares of global trade and finance are important determinants of the status of its reserve currency. China now accounts for 16 percent of world gross domestic product (17 percent if measured by purchasing power parity rather than market exchange rates) and 10 percent of world trade in goods and services. In 2014-2015, it is estimated to have accounted for about one-third of world GDP growth.
• Open capital account: Reserves must be acceptable as payments to a country’s trade and financial partners, which requires that the currency be easily tradable in global financial markets. China is gradually and selectively easing restrictions on both inflows and outflows. The capital account has become increasingly open in de facto terms, but there are a number of capital controls still in place.
• Flexible exchange rate: Reserve currencies are typically traded freely and their external value is mostly market determined. China has over time increased the flexibility of the exchange rate and, in principle, permitted market forces to play a bigger role in foreign exchange markets. Despite these changes, China still has a closely managed exchange rate, which will become increasingly hard to control as the capital account becomes more open.
• Macroeconomic policies: Investors in a country’s sovereign assets must have faith in its commitment to low inflation and sustainable levels of public debt, so the value of the currency is not in danger of being eroded. China has a lower ratio of explicit public debt to GDP than most major reserve currency economies and has maintained moderate inflation in recent years.
• Financial market development: A country must have broad, deep, and liquid financial markets so that international investors will have access to a wide array of financial assets denominated in its currency. China’s financial markets have become large but are highly volatile, poorly regulated, and lack a supporting institutional framework.
5. Since 2009, the PBC has moved aggressively to establish bilateral local currency swap arrangements with other central banks in order to facilitate and expand the use of the RMB in international trade and financial transactions.
6. So far, 34 central banks have signed such bilateral arrangements with the PBC and has become part of international reserve portfolios. A number of central banks have added or are considering adding RMB-denominated assets to their reserves.
7. The IMF estimates that in 2014, about 1.1 percent of official foreign currency assets were held in RMB, up from 0.7 percent in 2013. This puts the RMB in the seventh spot in terms of the identified composition of official foreign currency assets.
SPECIAL DRAWING RIGHTS
1. The IMF executive board voted to expand the Special Drawing Rights (SDR) basket to include the RMB. The new basket will become effective in October 2016. The RMB’s inclusion in the SDR basket (with a weight of 10.9 percent) is an important symbol of the currency’s ascendancy in global finance as it thus attains the IMF’s imprimatur as an official reserve currency.
2. Domestic opposition to further financial sector reforms and market-oriented liberalization measures remains fierce, and the IMF decision by itself is unlikely to shift the balance substantially.
3. There could be significant effects on the patterns of global capital flows if this decision does lead to further financial sector reforms, capital account liberalization, and exchange rate flexibility in China.
4. These changes would open the doors for more capital inflows into China and also further tilt the composition of China’s outflows away from foreign exchange reserve accumulation by the central bank, as it will spur more foreign investments by China’s households, corporations, and institutional investors.
