Initially 16, currently 4; the SDR — a synthetic currency — created by the IMF in 1969 — has changed over time to include the currencies of countries with the largest share in exports of goods and services. China’s reminbi (RMB) became the fifth currency in the SDR basket on Sunday.

The weight and the composition of the currencies in the SDR are revised every five years (latest one in 2010) by the IMF to determine relative weights of each currency in the basket. After the inclusion of RMB in the SDR basket the weight of the other four currencies — dollar, euro, pound, and yen — will be reduced to 41.73pc, 30.93pc, 8.09pc, and 8.33pc, respectively. The RMB’s weight will be 10.92pc becoming the third-most important currency, after the dollar and euro.

For any currency to be included in the basket, it has to qualify for two criteria 1) the country should have a significant share in global exports (China remains at the 3rd position for the past five consecutive years) and 2) the potential currency should be ‘freely usable’.

The term ‘freely usable’ is defined as a currency that is widely used in international payment transactions, and is extensively transacted in major foreign-exchange markets.

To develop the RMB’s status as a reserve currency, the Chinese are expected to continue capital account liberalisation, allowing even greater access to the RMB, both offshore and onshore

In order to have more open financial markets, the Chinese government took a number of steps to encourage greater participation in the country’s foreign exchange, bond and equity markets.

One such step was to enter into a number of bilateral swap agreements with central banks in the ASEAN region under the Chiang Mai Initiative of November 2000. As of September 2015, 34 central banks have signed these agreements, with a total amount of roughly half a trillion dollars (RMB 3.16tn).

Following several other steps, access to the Chinese onshore interbank bond markets was further liberalised in July 2015 when PBoC announced that foreign central banks, sovereign wealth funds and international financial institutions could now access the onshore interbank markets for bond, repo, IRS, and other permitted products after registering with the PBoC.

In September 2015, the PBoC announced full liberalisation of FX trading in China’s interbank FX market and allowed public sector investors to access the onshore Chinese FX market.

The PBoC has also been opening up access for private institutions to onshore FX and bond markets. On Feb 24, the PBoC announced the opening of the onshore interbank bond market to foreign qualified institutional investors with no quota restrictions on the investments by these medium- and long-term investors.

Thus the RMB has established itself as an international currency, traded both on- and offshore in increasing volumes.

In 2013, the RMB was the ninth most traded foreign currency in the world and by 2014, the fifth most used payment currency, in terms of volumes, reported by SWIFT. By August 2015, the RMB had surpassed the yen to become the fourth global payment currency with a market share of 2.79pc, creating a historical high. The market shares of the first three, namely the dollar, euro and pound, were respectively 44.8pc, 27.2pc, and 8.5pc.

And the daily average turnover of the RMB offshore market (London) more than doubled in the last two years (from $19bn in April 2013 to $43bn in April 2015). Data for Hong Kong also shows further growth, with a daily turnover of $93bn in April 2015 up by 88pc from $49bn in April 2013. Chinese markets have remained behind those belonging to the other four currencies in the SDR in terms of turnover.

The presence of the RMB in the portfolio of reserve managers remains more difficult to assess because of lack of data. The Bank for International Settlement’s annual report 2015 estimated the share of foreign exchange reserves in RMB at 1pc and the IMF 1.1pc in 2014, up from 0.7pc in 2013. For 2016, the share is expected to rise to about 2pc of total global reserves of portfolio managers. Currently, the US dollar accounts for 60pc of global foreign exchange reserves with unabated demand, even after the global financial crises of 2007/08.

To develop the RMB’s status as a reserve currency, the Chinese are expected to continue capital account liberalisation, allowing even greater access to the RMB, both offshore and onshore.

Management practices for asset allocation of reserves follow the well known paradigm of safety, liquidity and return. In the case of the RMB, it is safe to say that higher interest rates, along with appreciation expectations, have prompted a number of central banks to diversify a fraction of their reserves into the Chinese currency.

Since 2013, at least six African countries, - Angola, Ghana, Kenya, Nigeria, South Africa and Tanzania - have publicly announced investments in RMB-denominated assets. It goes without saying that the growing economic ties between Africa and China over the last decade have played a role in promoting the RMB’s internationalisation in the region.

The SDR status is only a starting point for transforming China from a big financial entity into a strong financial powerhouse. It will prove more effective to promote China’s financial system reforms and improve the efficiency of its financial market.

The writer is working in a government organisation.

A Fulbright scholar, he did his Masters in Economic Policy Management from Columbia University, NYC, US

Published in Dawn, Business & Finance weekly, September 26th, 2016