Chinese RMB on its way to becoming international currency

China’s RMB joins the U.S. Dollar, Euro, Yen, and the British Pound in the SDR (Special Drawing Rights) basket as the fifth currency with a weight of 10.92%! This is a historic milestone for the IMF, SDR, and China, and “the first time” in history that the SDR basket is expanded.

In October this year, the International Monetary Fund (IMF) added the Chinese Renminbi (RMB) to the basket of currencies that make up the Special Drawing Right, or SDR. The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries´ official reserves. Currencies with SDR status can be exchanged among governments for freely usable currencies in times of need.

The RMB´s inclusion is an important step in the integration of the Chinese economy into the global financial system.  First of all, this reflects China´ expanding role in global trade and the substantial increase in the international use and trading of the Renminbi. And it also recognizes the progress made in reforming China´s monetary, foreign exchange, and financial system. Secondly, the RMB’s global reserve status also means that it will become the first emerging market currency that can be used to settle IMF credits and debts. Thirdly, RMB inclusion in the SDR calculation is part of the global effort to transform the currently out-dated international financial system in order to be more reflective and representative of the changing world economic order.

The rising global use of RMB promises substantial business opportunities in trade, investment, cash management, and funding. RMB´s inclusion into the SDR basket is both an opportunity and a challenge. It represents an international recognition of China´s economic progress. But at the same time, China still lags far behind the advanced markets, and the RMB´s share in the market still remains small, and RMB´s status in global trade, financial trading, and reserves is not on a par with US dollar and the British pound. Therefore, China still has a long way to go and a lot of work to do, such as continuing opening up its financial market, expand the RMB backflow channels and diversify the investing channels for overseas RMB holders; keeping upgrading its domestic financial market, diversifying financial products; freeing up the capital accounts and improving the convertibility of capital accounts gradually.

RMB internationalisation has opened the door to many new opportunities. Importers and exporters routinely seek help in using RMB for the purchase or sale of goods and services, through intercompany loans, investment services, dividends, and cash pooling. RMB’s inclusion is beneficial for China and the EU in that they can broaden the scope of current currency mechanisms and achieve a better cooperation.

 

Richard Hoffmann

Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis-beijing.com

Ecovis Beijing

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