The International Monetary Fund recently concluded its quinquennial review of the composition of the Special Drawing Right (SDR), accepting the Chinese currency into the SDR basket alongside four major international currencies — the US dollar, the euro, the British pound and the Japanese yen. The Chinese government has spent a great deal of energy and political capital to achieve this outcome. This policy paper explains China’s interest in this seemingly exotic and technical pursuit, identifying the political and economic motivations underlying this initiative. It discusses the controversial reactions to China’s bid for the SDR basket from the international community and from various groups within China. It also explores some plausible and implausible consequences of the renminbi’s (RMB’s) inclusion in the SDR basket. It argues that the inclusion of the Chinese currency in the SDR basket may well play a facilitating role in China’s financial liberalization, but it does not in itself transform the RMB into a global reserve currency. The latter will involve a more protracted process, requiring serious institutional reforms in China.
