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

Last Updated: 3 February 2016
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.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

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
24 Jan 2018, Seminar, San Francisco, United States

Dentons will host our Fourth Annual Courageous Counsel Leadership Institute in January, centered on the theme "Cultivating Innovation."

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”

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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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