The decision on Nov.30 by the International Monetary Fund (IMF) Executive Board to include the Chinese currency RMB into its Special Drawing Rights (SDR) basket has won public attention and widespread applause. The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. It can be exchanged among governments for freely usable currencies in times of need [[1]]. As the fifth currency after dollar, euro, Japanese yen, the pound in SDR, it is said that the RMB will take effect in October 2016.

As a routine, the IMF conducts a regular five-yearly review of SDR basket and this time, the IMF board, representing the fund’s 188 member countries, claiming in a statement that RMB is eligible to all criteria. Christine Lagarde, managing director of the IMF, calls the decision "an important milestone in the integration of the Chinese economy into the global financial system[[2]]." Undoubtedly, it is an acknowledgement of the rise of China's economy. As a result, what opportunities and challenges will this major inclusion of RMB into SDR basket bring about? This is exactly what the paper is trying to answer.

On the one hand, it is commonly believed that the entry of RMB into SDR is good news to financial market, especially the internationalization of RMB and the representativeness of SDR.

Firstly, the accession to SDR has an important symbolic significance for the internationalization of RMB. To a certain extent, it represents the endorsement of IMF and the international society, which are both the recognition of China's growing influence in the world economy, but also conducive to enhance the confidence of market for RMB. SDR currencies are generally regarded as safe haven currencies, and this position will undoubtedly increase the use of the Chinese yuan. Meanwhile, as China is to implement the “One Belt, One Road” initiative in the next few years, as well as encourage the Go global strategy for Chinese enterprises, a better internationalized Chinese currency will definitely accelerate China's foreign investment in coming years.

Secondly, the entry of SDR will also increase the representativeness and attractiveness of the IMF. “If RMB successfully joined SDR this year, it will be the first new basket currency in the post Bretton Woods era, and will also be the first SDR currency from the developing countries. This will be an important milestone in the history of the development of the international monetary system”, an analyst said. What’s more, it is a historic victory in IMF for an developing country to be appointed as the issuer of one of the world’s major reserve currencies, making great progress on giving emerging markets their rightful voting shares. As the currency of world's second largest economy and top trader country, excluding RMB from the SDR basket will light the concern of emerging markets that IMF remains an institution run by and for the benefit of advanced economies[[3]].In addition, the Asian Infrastructure Investment Bank (AIIB) set up by China also exert a huge competitive pressure to IMF. Therefore, IMF's decision is not only the flow, but also enhances the representativeness and legitimacy of itself. And that help improve the current international monetary system, which in turn will support the growth and stability of global economy.

Thirdly, there are two strict access standards for RMB, including the volume of the export trade of the currency issuing country, and whether the currency can be used freely in international transaction. China is the world's largest exporter. It is the free accessibility to the RMB that has been the stumbling block. Aiming to create the conditions for the RMB to join the SDR, the policy measures that Chinese government takes will promote the reform and opening of China's financial system, which has a profound impact on China's economy. The effort to join SDR will be transformed into an irreversible process of financial liberalization, forcing China's financial sectors to face competition and improve efficiency. If handled properly, the impact of RMB's entry into SDR on China's financial industry are comparable to a promotion to the real economy in the year when China's entry into WTO.

On the other hand, as a saying goes, “every coin has two sides” and the RMB’s entry into the SDR is no exception. In other word, we should also be wary of the potential risks and challenges of this inclusion.

Above all, RMB to join SDR means to open capital accounts. Though in the past we have capital control system like a “breakwater”, that is, when non-performing foreign capital comes we can keep it out, now they can come in or go out casually. Compared with developed economies with capital account liberalization, the problem we are facing is that our exchange rate flexibility is not enough while the degree of openness of our capital accounts increase. It is different degree of openness between the flexibility of exchange rate and capital account that lead to impressive failures of the capital account opening in emerging economies, such as the Asian financial crisis in 1997, the financial crisis in Latin America in 2001, which provide valuable lessons for China.

What’s more, Once the RMB to become an international currency, we have to face the financial market that is more complex than ever before, and China's existing financial regulatory system cannot be a good deal. For example, although we now lift the interest rate control, our central bank is still not able to establish a benchmark interest rate system to guide the entire interest rate system. So this requires us to further reform the financial regulatory agencies to clear the division of labor, promote communication and cooperation, and then to avoid the emergence of systemic risk.

Moreover, the central bank's macro-control capacity will face challenges undoubtedly. In essence, once the RMB internationalization, it means that the traditional policy controlling the number of our currency becomes no longer applicable. For instance, if the central bank’s macro-control capacity are unable to stabilize the exchange rate fluctuations, the impact on export enterprises as well as workers will be catastrophic. The internationalization of RMB is not an overnight process, each step has the opportunity and the challenge, and, just as the saying goes, “one careless move loses the whole game.”

It is an unequivocal acknowledgement that China is one of the greatest financial powers. On the one hand, the IMF decision is credited as a huge symbolic victory for China, marking recognition of RMB’s rising role in global financial markets. On the other hand, it also means that the international society expects China to play a bigger role in the international economic and financial system. However, though the inclusion of the RMB in the SDR basket is a big step further forward to internationalization, it is not the end. Consequently, we should take this milestone as an opportunity for further financial reform and opening up, continuing reform process to build an increasingly open and market-oriented economy. In especial, it is necessary to deal with the relationship between government and market, so that the market can plays a decisive role in the allocation of resources and promotes the national economy.

All in all, in order to make the RMB truly become the world currency, Reform and Opening-up are still in need. As long as we keep going on this path, we have every reason to believe that the IMF decision on Monday will eventually results in closer interaction between China's economy and whole world, just as the country's formal accession to the World Trade Organization did more than a decade ago. And like the latter, it will leave an ineffaceable mark on history.