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In July, the People's Bank of China made it easier for other central banks, sovereign wealth funds and international financial institutions such as the World Bank to invest in China's inter-bank bond market. In August, the authorities gave market forces a greater role in how the central parity rate of the renminbi against the US dollar's daily trading band is determined. And in October, China increased the quota for how much South Korean institutional investors can invest through the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, while in November, China increased Singapore's RQFII quota and designated Malaysia as a new RQFII participant.
The SDR inclusion is likely to prompt more moves by China to progressively open its doors to two-way capital flows. A Shenzhen-Hong Kong equivalent of the Shanghai-Hong Kong Stock Connect, which allows investors from both sides direct access to each other's market, is in the works. So is a scheme that will start allowing retail investors in mainland China to invest overseas.
As China seeks to rebalance its economy towards more consumption, services and higher-value manufacturing, it needs a more open capital account: liberalisation will help support economic growth, improve the allocation of capital, and help bring down borrowing costs. The SDR inclusion is another step in this important and fundamental change.
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