ANNUAL REPORT

45
reserves to defend the RMB. 75 It also has failed to communicate its
foreign exchange policy; twice in the past year, the PBOC’s poorly
communicated efforts to make the RMB more market driven resulted
in significant market turbulence.*
China’s RMB Joins the IMF’s Special Drawing Rights
Currency Basket
The RMB’s addition to the basket of the SDR—the IMF’s international
reserve asset—took effect on October 1, 2016.† The IMF
executive board decided in November 2015 that the RMB “met all
existing criteria” for SDR basket inclusion, including being “freely
usable,” defined as being “widely used” for international transactions
and “widely traded” in major foreign exchange markets. 76
The decision was reportedly unanimously supported by IMF executive
board members, including the United States. 77 The addition
of the RMB to the SDR basket—currently composed of the dollar,
euro, pound, and yen—has been a key policy objective for Beijing
both as a symbol of its economic importance and role in the global
economy and as part of its efforts to increase the international
use of the RMB. 78
Christine Lagarde, managing director of the IMF, said the
RMB’s inclusion is “a recognition of the progress that the Chinese
authorities have made in the past years in reforming China’s
monetary and financial systems.” 79 Following the announcement,
the PBOC pledged China “will speed up the effort to promote
financial reforms and opening.” 80 Dr. Prasad said that while the
decision will encourage China’s reformers, “domestic opposition
to further financial-sector reforms and market-oriented liberalization
measures remains fierce, and this decision by itself is unlikely
to shift the balance substantially.” 81
Aside from earning China economic prestige, the immediate
impact of the RMB’s inclusion in the SDR basket will be limited,
given the SDR’s minor share of global reserves.‡ In the longer
term, central banks may increase their holdings of the RMB, and
investors may be encouraged to hold RMB-denominated assets.
Standard Chartered, a multinational banking and financial services
company, estimates the RMB’s new status as a reserve asset
will lead to a 1 percent shift (about $1 trillion) of global reserves
into RMB-denominated assets over the next five years. 82 Use of
the RMB for trade settlement is still small, but has been growing
steadily: according to SWIFT, a global provider of financial mes-
* In August 2015, an unexpected move by the PBOC to cut its daily reference rate for the RMB
prompted a further fall in its currency market and market selloffs. In January 2016, the PBOC’s
surprise move to guide the RMB weaker against the dollar sparked a second selloff. In both cases,
the PBOC had to intervene heavily, using its foreign exchange reserves to prevent the RMB from
falling too much. Keith Bradsher, “China to Track Renminbi Based on Basket of Currencies,” New
York Times, December 11, 2015; Lingling Wei, “China Challenged to Keep Yuan Stable as Dollar
Rises,” Wall Street Journal, May 16, 2016.
† Effective October 1, 2016, the weights of the SDR currencies will be: 41.7 percent for the U.S.
dollar, 30.9 percent for the euro, 10.9 percent for the RMB, 8.3 percent for the Japanese yen, and
8.1 percent for the pound sterling. International Monetary Fund, “Review of the Special Drawing
Right (SDR) Currency Basket,” April 6, 2016; International Monetary Fund, “IMF’s Executive
Board Completes Review of SDR Basket, Includes Chinese Renminbi,” November 30, 2015.
‡ According to IMF data, SDR holdings made up 2.1 percent of global reserves at the end of
2014. International Monetary Fund, “IMF Annual Report 2015: Appendix I,” 2015.