China: China's Inclusion In The IMF's SDR Valuation—Another Illustration Of China's Integration In The Global Economy

Last Updated: 24 December 2015
Article by Thomas W. Laryea and Alex Wang

The inclusion by the International Monetary Fund (IMF) of China's renminbi (RMB) in the basket of currencies used to calculate the value of the Special Drawing Right (SDR) is a notable development in the international financial system. As stated by the IMF's Managing Director, Christine Lagarde:

"The [IMF] Executive Board's decision to include the renminbi in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy."

In order to understand this development and its likely direction, it is important to comprehend what the IMF did (and did not do) on November 30, 2015, its place in history and what this signals for the future.

What is the SDR?

The SDR is an international reserve asset created by the IMF to supplement official reserves of IMF member countries. At the time of the SDR's creation in 1969, the international monetary system operated under the so-called gold standard in which currencies of IMF member countries were required to be in fixed parities based on gold (or more precisely other currencies were in fixed parity with the US dollar whose convertibility to gold was guaranteed). During the gold standard, one unit of SDR was valued as equivalent to 0.888671 gram of the fine gold value of the US dollar in 1944 (when the IMF was established). With the collapse of the gold standard in the early 1970s due to the inability of the then high inflationary US economy to credibly guarantee fixed US dollar convertibility to gold, the IMF sought to wean the global financial system away from gold-US dollar dependency and instead the IMF sought to promote the SDR to become the "principal reserve asset in the international monetary system."

Ironically, a limitation in the SDR's capacity to play such a central role has been a provision in the IMF's international legal treaty, the Articles of Agreement, which limits the circumstance in which the IMF can allocate SDRs to IMF member countries, namely where the IMF determines that there is a need for additional global liquidity. Based on this legal provision, the IMF has decided to allocate SDRs on only four occasions, the last of which was in 2009 during the liquidity crunch of the global financial crisis. At that time, SDR 182.6 billion was allocated, out of a total of 204.1 billion SDR that have been allocated to date. The volume of allocated SDRs is miniscule compared to the around 11.5 trillion of foreign exchange reserves held by central banks, around 65 percent of which is denominated in US dollars. (Notably, China represents the largest holder of US dollar reserves. Conversely, only 1 percent of global foreign exchange reserves are held in RMB). In addition to the constraints on allocation of SDRs, the use of SDRs is also limited by the IMF's Articles of Agreement: to use in payments among IMF member countries, by the IMF itself and by certain official entities prescribed by the IMF (such as the Bank for International Settlements). Accordingly, the SDR cannot be used for payments by private parties, who in the modern day are a major component of the global financial system.

The decision by the IMF on November 30, 2015 is not directly related to the allocation or use of SDRs. Rather, the decision is focused on the valuation of the SDR. The IMF's methodology for determining the value of the SDR is based on a basket of currencies, which currently comprises the US dollar, the euro, the Japanese yen and the UK sterling. The composition of this currency basket depends on two criteria: (i) currencies that are issued by IMF member countries or monetary unions whose exports had the largest value over a five-year period, and (ii) currencies that have been determined by the IMF to be "freely usable." With China as the third largest export country in the globe, the first criterion was met with little debate. But questions had been raised as to whether the RMB could be characterized as "freely usable" within the terms of the IMF's Articles of Agreement. The relevant provision in the IMF's Articles of Agreement defines a freely usable currency in relation to whether the currency is widely used to make payments for international transactions, and is widely traded in the principal exchange markets. This definition is not the same as that for a "freely convertible" currency, although in practice controls on a currency can limit its wide international use, as had arguably been so in China's case. In order to dispel such questions, the Chinese authorities have continued to introduce a series of measures to liberalize the foreign exchange regime and to moderate controls in relation to the RMB.

China's progressive liberalization of foreign exchange and RMB controls

China's approach to its progressive liberalization of foreign exchange controls broadly reflects the distinction made in the IMF's Articles between: (i) international payments for current transactions, which IMF member countries are generally required to liberalize, and (ii) international capital movements, with respect to which IMF member countries generally preserve freedom to restrict. Accordingly, the Chinese government has substantially lifted foreign exchange controls in relation to current account transactions (e.g. payments for imports). Chinese companies are no longer required to obtain an approval from the State Administration of Foreign Exchange (SAFE) or its local counterpart to open a foreign exchange account for purposes of engaging in current account transactions and for these transactions Chinese companies are generally allowed to convert their onshore RMB into foreign currencies, remit the same offshore or retain their foreign currency revenues either onshore or offshore, without being subject to a foreign exchange quota.

China has also relaxed foreign exchange controls on capital account transactions in the past decade. Most outbound investment projects (except for those involving sensitive industries or regions) to be pursued by Chinese domestic investors are now only required to be filed with—and not approved by—the Chinese authorities before the private parties are allowed to convert their onshore RMB funds into foreign currencies for the purpose of making the relevant outbound transactions (which generally include green field investments and M&A transactions, but exclude investments in offshore capital markets). In 2006, the Chinese government introduced a Qualified Foreign Institutional Investors (QFII) scheme. This scheme opened a gate to qualified foreign institutional investors to invest in Chinese capital markets within a foreign exchange quota. In the next year, the Chinese authorities rolled out a Qualified Domestic Institutional Investors (QDII) scheme, which allowed qualified Chinese financial institutions to make investments in qualified offshore capital markets, also within a foreign exchange quota.

Furthermore, the Chinese authorities' effort to expand the use of RMB in international transactions was precipitated in July 2009, when China's central bank launched a pilot scheme allowing domestic companies in certain pilot regions to directly use RMB for cross-border trading settlements. This scheme was expanded nationwide in 2011. Starting from January and October 2011 respectively, Chinese domestic companies have been allowed to make outbound direct investments and foreign companies have been allowed to make inbound direct investments using RMB funds. In December 2011, China introduced a RMB Qualified Foreign Institutional Investor (RQFII) scheme. This scheme enables qualified foreign institutional investors to utilize RMB funds for their investments in Chinese capital markets. Subsequently, in November 2014, a similar scheme (RMB Qualified Domestic Institutional Investor—RQDII) was launched to allow qualified domestic institutional investors to use RMB funds to invest in qualified offshore capital markets. These measures and others demonstrate the Chinese authorities' resolution to turn RMB into a more freely convertible and internationalized currency.

A journey for the IMF, China and others

As noted by the IMF Managing Director, the approach of inclusion of the RMB in the SDR basket of currencies, also represents a journey for the IMF and not just for China. It is a far cry from the stand-off experienced between the IMF and China less than a decade ago over whether the IMF, in exercise of its quasi-regulatory "economic surveillance" function, would determine the exchange rate of the RMB to be "fundamentally misaligned." The approach with regard to the SDR also side-steps—or at least mitigates the frustration of China (and other fast growing emerging market economies)—that have been waiting for IMF governance reform to provide them with greater economic weight and voting power within the institution.

The effective date of the IMF's determination of the RMB as a freely usable currency and its inclusion in the SDR basket of currencies has been deferred to October 1, 2016 in order to allow time for adjustment within the IMF's operations. At that time, the new respective weights of the SDR currencies will be: 41.73% for the US dollar; 30.93% for the euro; 10.92% for the Chinese RMB; 8.33% for the Japanese yen and 8.09% for the UK sterling.

While we can today say that a milestone for China's ascendency in the global economy has been reached, it would probably take many years for central banks and other asset managers to increase materially their holdings in RMB denominated assets. However, we can expect the Chinese authorities to immediately promote greater use of RMB in the international financing of the government and the corporate sector. For example, with the announcement on December 4, 2015 at the Forum on China-Africa Cooperation of China's commitment of US$60 billion in financing to the African continent over the next three years, we can expect an increasing proportion of such financing to be denominated in RMB. This is merely one illustration of the growing importance of understanding China's currency regime for actors engaged with China's increasing global economic influence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
17 Oct 2018, Seminar, Washington, DC, United States

Earn up to six hours of credits towards Virginia's October 31 MCLE compliance deadline (credit approval is pending) at this full-day program.

25 Oct 2018, Other, New York, United States

Once again, Dentons is proud to bring together insurance industry leaders, lawyers and regulators for a full-day examination of the most current issues.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions