The article below and the attachment are worth reading to get an overview of why the inclusion of the RMB is a significant international event and of importance in the development of the Chinese economy.
The more you read this the clearer it becomes.
Welcome to the new global reserve currency
Renminbi officially becomes an SDR basket currency on 30 November
The Executive Board of the International Monetary Fund (IMF) officially admitted the renminbi as its fifth Special Drawing Right (SDR) reserve currency on 30 November (see A milestone for renminbi internationalization, 1 Dec). The implementation of the corresponding changes will take place from now to 1 October 2016, the implementation day. We have compiled a selection of reports we published on renminbi internationalization since 2011 to provide a snapshot of how the story has played out.
As we noted in RMB’s roadmap towards full convertibility (7 Apr 2011), renminbi internationalization has been a policy priority since 2011, when the government identified four key pillars: interest-rate liberalization, exchange-rate liberalization, capital account convertibility and development of the offshore renminbi market. In March this year, we also noted that the timing for SDR inclusion was ripe, allowing the renminbi to become an international currency (see China Development Forum takeaways (1): the renminbi as a new reserve currency, 24 Mar).
An important milestone in renminbi internationalization
PBoC governor Zhou Xiaochuan noted in March 2009 that the world could benefit from a reserve currency through reform of the international monetary system. By including the renminbi in the SDR basket, the IMF not only includes the voice of the second-largest economy in the world, but also introduces a new balance with participation of a developing economy. This is an important endorsement of the role of the SDR.
We believe the renminbi’s inclusion is an important milestone, with important strategic implications for China’s financial reform. Externally, the decision helps to boost market confidence in the renminbi as an international currency, and allows for more proactive participation and international agenda-setting clout by China. As China takes on more responsibility as a leading country, it is more equipped to deflect foreign pressure, which contributed to both Japan’s lost decades (see Will China fall into a liquidity trap? 11 June 2013) and Asian Financial Crisis in 1997-1998 (see Are we looking at another Asian Financial Crisis? We think not, 28 Aug).
Domestically, SDR inclusion also represents undeniably important recognition of the progress of financial reform in China. Of the past five years, structural reform has been most aggressive in the financial sector. In 2015 alone, China has opened the domestic interbank bond market to overseas central banks (see Opening of bond market a sign of China’s commitment to SDR, 15 Jul), launched exchange rate reform (see Renminbi exchange rate now more market-based and a step closer to SDR inclusion, 11 Aug) and completed interest-rate liberalization, all before starting a new mechanism that involves a market interest-rate corridor (see Interest-rate corridor and the PBoC’s new monetary policy framework, 27 Nov).
Triggering further reforms
In our view, the renminbi’s inclusion in the SDR will also promote four key transformations in the economy: 1) going from being an export-oriented economy to one focused on domestic demand; 2) from engaging in low-end manufacturing to moving up the value-added chain and establishing a strong service sector; 3) from being reliant on foreign direct investment (FDI) to adopting the “go abroad” strategy of Chinese enterprises; and 4) from an administration-oriented market towards a more market-based financial market (see RMB internationalization and China’s economic transformation 21 Nov 2011).
While the SDR is not a binding requirement for international reserve holdings, it is a catalyst for portfolio reallocation. The IMF found that the renminbi now accounts for roughly 1.1% of official foreign currency assets globally. We expect this percentage to rise to 4-5% in five years, with interest coming particularly from other developing economies. We estimate that additional demand for renminbi will likely be equivalent to around USD300-400b. As a result, we believe demand for renminbi will: 1) trigger development of China’s bond market; and 2) provide support for the renminbi against the USD in the current range of CNY6.35-6.40 until end-2016.
Jianguang Shen Mizuho Securities Asia Limited