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THE inclusion of the yuan in the International Monetary Fund’s （IMF） currency basket of Special Drawing Rights （SDR） marked 2015 as a milestone in the internationalization of the Chinese currency. A higher convertibility rate for the yuan is closely related to the improved position of the Chinese economy. Since China became the world’s second largest economy， great progress has been achieved in making the yuan more international.
Although the yuan’s inclusion will diversify international reserve currencies， it will not change the U.S. dollar’s position as the leading international reserve currency for the foreseeable future.
More convertible yuan
China’s ascendance in the world economy can be measured by six aspects.
First， China overtook Japan to become the world’s second largest economy in 2011.
Second， China is now the world’s largest trading nation and the third largest economic trading zone. China’s imports and exports of goods totaled $4.3 trillion in 2014， surpassing the United States’ $3.97 trillion. As an economic trading zone， considering the average total of trade in goods and services over the past three to five years， the Chinese yuan zone ranks third after the euro zone and the dollar zone. However， the differences among the three trading zones are hard to discern.
Third， China has become one of the most important foreign investors and foreign aid providers. Every year China attracts more than $200 billion worth of foreign investment and makes an outbound investment of about $80 billion.
Fourth， after China reformed the way of determining the yuan interest rate in July 2005， the currency’s exchange rate has been rising. From July 2005 to April 2014， the yuan’s nominal effective exchange rate appreciated by 40.5 percent. The yuan is the only currency that has appreciated this much against the dollar over the past decade.
Fifth， in the past decade， China’s domestic financial market has expanded. Treasury bonds played a major role in the local bond market five years ago， but now the use of corporate bonds and negotiable instruments is growing rapidly.
Sixth， China’s financial market is more open. Chinese financial institutions are increasingly developing their overseas businesses， including mergers and acquisitions in foreign markets. Such mergers are made not only in developing countries， but also in the developed economies of Europe and the United States. Meanwhile， international capital and investment institutions have entered the mainland market in growing numbers. The use of the yuan in overseas markets started in the late 1990s， when most of China’s neighboring economies were beat by the Southeast Asian financial crisis. During that time， only two currencies did not depreciate against the U.S. dollar： the yuan and the Hong Kong dollar. Since then， demand for the yuan from foreign institutions and residents has been growing.
The official move to make the yuan more available internationally started in 2009， against the background of the global financial crisis that began in the United States in 2008. Three factors contributed to the yuan’s global prominence： China’s growing economic and trade volume， a stable and appreciating exchange rate of the yuan， and an open economy.
According to a statement by the People’s Bank of China （PBC）， the central bank， in June 2015， the yuan became the world’s second largest currency for trade and financing. At the end of 2014， it was the fifth largest payment currency and the sixth largest foreign exchange currency. Also， 23.6 percent of cross-border transactions between China and other countries were settled in yuan. By the end of May 2015， the PBC reached swap deals with 32 countries and regions， hitting 3.1 trillion yuan （$484.37 billion）. It also reached yuan-clearing arrangements with 15 countries and regions.
Remarkable progress has been made in the globalization of the yuan. Several factors have advanced its progress， including promotion by the government， the Belt and Road Initiative， the establishment of the Asian Infrastructure Investment Bank， and a settlement system.
A more attractive basket
Regardless of the progress， just how important is it for the yuan to be included in the SDR basket？
The SDR is an important reserve asset created by the IMF in 1969 to supplement its member countries’official reserves of gold， foreign exchange and IMF quotas. Now the SDR is used mainly for three purposes. In all IMF statistical reports， currencies are calculated via the SDR. Through the SDR， IMF member countries can lend and borrow internationally. In addition， the SDR is also used by the private sector.
Although the dollar and euro are both international reserve currencies， the SDR is still a super-sovereign international reserve asset whose price is stable. It is not yet an international currency or a composite currency and cannot be used for payment at the moment， but in theory it can become a composite currency. The SDR can also make cross-border capital flows fluctuate less. As it is now a basket of reserve currencies， it is plausible that it can be developed into a supra-sovereign currency in the future.
The yuan’s inclusion will enhance the SDR’s global representation. With a fifth currency in the basket， the SDR will ensure a stable value， and IMF member countries will have more options in deciding their reserve assets. The SDR will become more appealing. Why didn’t the scale of the SDR expand for so many years？ Possibly because it wasn’t appealing enough. If it becomes more attractive， it will definitely be more widely used.
Reform after decades
Will the yuan’s inclusion in the SDR mean the dollar will be used less in international reserves？ Will there be more international reserve currencies？ The euro was an addition to the international reserves. But once the currency was created， international reserves actually become less diversified as the euro replaced 11 European currencies.
The dollar accounts for a large proportion of international reserves， mainly because the foreign exchange reserves of developing countries have grown rapidly in the past three decades. Changes in foreign exchange structures in developing countries relate to their exchange rate regimes， foreign debt sizes， policies addressing financial crisis and their options of foreign exchange reserve currencies. In their current structure， developing countries have few choices in terms of selecting currencies， and the small scales of their domestic financial markets also restrict their options.
Progress in the diversification of international reserves has been very slow in the past， even regressing in some cases. The yuan’s inclusion in the basket of foreign exchange reserves for various countries makes reserve currency stocks more diverse. The concept of a supra-sovereign currency is restricted to mere discussions inside academic circles worldwide because a worldwide currency must be supported by international treaties. Since it involves international relations， it cannot be decided only by the market. Readjustment of international relations will require consultations and compromises between countries. Step-by-step progression can be made in a peaceful environment.
The internationalization of the yuan will be an important factor in advancing the reform and evolution of the international monetary system. Without the yuan’s internationalization and inclusion in the SDR， the structure of international monetary relations would be the same as it was 30 or 40 years ago.
Even though the yuan’s inclusion in the SDR has brought one more optional reserve currency， the dollar will still be the most important international reserve currency for a long time yet.
The dollar accounts for 63 percent of total international foreign exchange reserves， tripling the proportion of U.S. GDP in the world total. In the next decade， the dollar may be used less in international reserves， but the proportion could still be over 50 percent. Ca
（The author is Dean of the Department of Finance at
Beijing Normal University）
Although the yuan’s inclusion will diversify international reserve currencies， it will not change the U.S. dollar’s position as the leading international reserve currency for the foreseeable future.
More convertible yuan
China’s ascendance in the world economy can be measured by six aspects.
First， China overtook Japan to become the world’s second largest economy in 2011.
Second， China is now the world’s largest trading nation and the third largest economic trading zone. China’s imports and exports of goods totaled $4.3 trillion in 2014， surpassing the United States’ $3.97 trillion. As an economic trading zone， considering the average total of trade in goods and services over the past three to five years， the Chinese yuan zone ranks third after the euro zone and the dollar zone. However， the differences among the three trading zones are hard to discern.
Third， China has become one of the most important foreign investors and foreign aid providers. Every year China attracts more than $200 billion worth of foreign investment and makes an outbound investment of about $80 billion.
Fourth， after China reformed the way of determining the yuan interest rate in July 2005， the currency’s exchange rate has been rising. From July 2005 to April 2014， the yuan’s nominal effective exchange rate appreciated by 40.5 percent. The yuan is the only currency that has appreciated this much against the dollar over the past decade.
Fifth， in the past decade， China’s domestic financial market has expanded. Treasury bonds played a major role in the local bond market five years ago， but now the use of corporate bonds and negotiable instruments is growing rapidly.
Sixth， China’s financial market is more open. Chinese financial institutions are increasingly developing their overseas businesses， including mergers and acquisitions in foreign markets. Such mergers are made not only in developing countries， but also in the developed economies of Europe and the United States. Meanwhile， international capital and investment institutions have entered the mainland market in growing numbers. The use of the yuan in overseas markets started in the late 1990s， when most of China’s neighboring economies were beat by the Southeast Asian financial crisis. During that time， only two currencies did not depreciate against the U.S. dollar： the yuan and the Hong Kong dollar. Since then， demand for the yuan from foreign institutions and residents has been growing.
The official move to make the yuan more available internationally started in 2009， against the background of the global financial crisis that began in the United States in 2008. Three factors contributed to the yuan’s global prominence： China’s growing economic and trade volume， a stable and appreciating exchange rate of the yuan， and an open economy.
According to a statement by the People’s Bank of China （PBC）， the central bank， in June 2015， the yuan became the world’s second largest currency for trade and financing. At the end of 2014， it was the fifth largest payment currency and the sixth largest foreign exchange currency. Also， 23.6 percent of cross-border transactions between China and other countries were settled in yuan. By the end of May 2015， the PBC reached swap deals with 32 countries and regions， hitting 3.1 trillion yuan （$484.37 billion）. It also reached yuan-clearing arrangements with 15 countries and regions.
Remarkable progress has been made in the globalization of the yuan. Several factors have advanced its progress， including promotion by the government， the Belt and Road Initiative， the establishment of the Asian Infrastructure Investment Bank， and a settlement system.
A more attractive basket
Regardless of the progress， just how important is it for the yuan to be included in the SDR basket？
The SDR is an important reserve asset created by the IMF in 1969 to supplement its member countries’official reserves of gold， foreign exchange and IMF quotas. Now the SDR is used mainly for three purposes. In all IMF statistical reports， currencies are calculated via the SDR. Through the SDR， IMF member countries can lend and borrow internationally. In addition， the SDR is also used by the private sector.
Although the dollar and euro are both international reserve currencies， the SDR is still a super-sovereign international reserve asset whose price is stable. It is not yet an international currency or a composite currency and cannot be used for payment at the moment， but in theory it can become a composite currency. The SDR can also make cross-border capital flows fluctuate less. As it is now a basket of reserve currencies， it is plausible that it can be developed into a supra-sovereign currency in the future.
The yuan’s inclusion will enhance the SDR’s global representation. With a fifth currency in the basket， the SDR will ensure a stable value， and IMF member countries will have more options in deciding their reserve assets. The SDR will become more appealing. Why didn’t the scale of the SDR expand for so many years？ Possibly because it wasn’t appealing enough. If it becomes more attractive， it will definitely be more widely used.
Reform after decades
Will the yuan’s inclusion in the SDR mean the dollar will be used less in international reserves？ Will there be more international reserve currencies？ The euro was an addition to the international reserves. But once the currency was created， international reserves actually become less diversified as the euro replaced 11 European currencies.
The dollar accounts for a large proportion of international reserves， mainly because the foreign exchange reserves of developing countries have grown rapidly in the past three decades. Changes in foreign exchange structures in developing countries relate to their exchange rate regimes， foreign debt sizes， policies addressing financial crisis and their options of foreign exchange reserve currencies. In their current structure， developing countries have few choices in terms of selecting currencies， and the small scales of their domestic financial markets also restrict their options.
Progress in the diversification of international reserves has been very slow in the past， even regressing in some cases. The yuan’s inclusion in the basket of foreign exchange reserves for various countries makes reserve currency stocks more diverse. The concept of a supra-sovereign currency is restricted to mere discussions inside academic circles worldwide because a worldwide currency must be supported by international treaties. Since it involves international relations， it cannot be decided only by the market. Readjustment of international relations will require consultations and compromises between countries. Step-by-step progression can be made in a peaceful environment.
The internationalization of the yuan will be an important factor in advancing the reform and evolution of the international monetary system. Without the yuan’s internationalization and inclusion in the SDR， the structure of international monetary relations would be the same as it was 30 or 40 years ago.
Even though the yuan’s inclusion in the SDR has brought one more optional reserve currency， the dollar will still be the most important international reserve currency for a long time yet.
The dollar accounts for 63 percent of total international foreign exchange reserves， tripling the proportion of U.S. GDP in the world total. In the next decade， the dollar may be used less in international reserves， but the proportion could still be over 50 percent. Ca
（The author is Dean of the Department of Finance at
Beijing Normal University）