Foreign Exchange Administration in the SDR Era

On October 1,the renminbi joined the elite group of currencies that comprise the Special Drawing Rights - a basket of global reserve assets devised by the International Monetary Fund. The renminbi accounts for 10.92% of the SDR basket,giving the Chinese currency a weighting behind the dollar and the euro but ahead of the yen and the British pound. This article looks at the impact of this move on China's foreign exchange management policies,and makes suggestions for needed regulatory changes in this new era for the renminbi.

International Balance of Payments

One possible result of this move could be greater volatility in cross-border capital flows. The renminbi's addition to the SDR basket could encourage central banks,sovereign wealth funds and institutional investors to increase their Chinese currency assets. There also might be a bigger international appetite for the renminbi as a result of the strategic initiative known as the "One Belt,One Road" program,which seeks to boost trade and investment with many of China's neighboring countries. Greater use of the renminbi offshore could reduce borrowing costs for Chinese companies operating beyond China's borders. At the same time,greater demand for renminbi offshore could affect domestic interest rates and the exchange rate and it could contribute to a more complex settlement environment for foreign exchange administration.

There could also be possible increases in the international balance of payments and a possible reduction in foreign exchange settlements. With the renminbi as part of the SDR,Chinese companies engaged in foreign trade could see increased confidence in setting prices as their foreign exchange risks decline. This could help expand exports as well as foreign direct investment and overseas mergers and acquisitions. It could also help spur cross-border e-commerce and tourism as the renminbi becomes more widely used. On the other hand,there could be a reduction in foreign exchange settlements.

Impact on Foreign Exchange Management

Supervision of cross-border capital flows will become more difficult. With more diversified and flexible channels for inbound and outbound capital movements,the task of monitoring currency mismatches and arbitrage activity will increase. In the meantime,there are more and more new offshore securities products denominated in renminbi,and the task of identifying risk will become increasingly difficult. Cross-border capital flows are based on data from international balance of payment declarations and bank settlements. However,with less foreign exchange as the result of the increasing renminbi cross-border settlements,there would be less data on renminbi payments of enterprises and individuals,complicating the task of identifying abnormal capital flows.

It will become necessary to initiate further reform of foreign exchange management under the capital account,including corporate and individual capital movements. The renminbi's addition to the SDR basket is a dynamic process which will ensure the international standing of the Chinese currency and add pressure for a gr