On October 1, the renminbi began an exciting new chapter in its journey to becoming a global currency.

On that day, the Chinese currency officially entered the Special Drawing Right (SDR) currency basket, joining the US dollar, the euro, the Japanese yen and the British pound in the elite “club” of global reserve currencies.

The IMF’s decision to admit the renminbi to this select grouping marks an important seal of approval, as it signifies that the renminbi is widely used and widely traded, even though it is still subject to some capital account restrictions.

A currency does not need to be part of the SDR basket to become a reserve currency. Similarly, SDR inclusion does not automatically translate into reserve-currency status. It is ultimately up to central banks to decide whether to hold assets denominated in a particular currency — and how much to hold.

What, then, is the significance of the renminbi joining the SDR basket, given that the SDR is not a currency and that few goods and services are priced in it?

First, it is a clear recognition of the renminbi’s development as a global medium of exchange. The “people’s currency” is now both widely used (ranked fifth by SWIFT, a network that banks around the world use to move money) and widely traded (ranked eighth by the Bank for International Settlements, a central bank for central banks).

More importantly, admittance into the SDR basket serves as a harbinger: the renminbi’s role in the global arena will continue to expand across the board.

Boost confidence

The renminbi’s current share of global payments is less than 2 per cent, whereas the dollar and the euro together account for more than 70 per cent. As companies and investors step up their use of the Chinese currency, this share will rise.

We believe that by 2020 half of China’s trade will be settled in its own currency, up from 26 per cent in 2015. Improved payment systems such as China’s Cross-Border International Payment System (CIPS) will help oil the wheels of this activity, while the IMF’s seal of approval should boost confidence that the renminbi is liquid and stable as a store of value.

Similarly, the renminbi’s share of global central bank reserves will also increase.

At the moment, the dollar and the euro together account for nearly 85 per cent of the world’s reserves, while the renminbi is not even recorded in the IMF’s regular surveys on central bank holdings. Following the development on October 1, this will now change: the renminbi will be separately identified in the IMF’s official reserves database, while the RMB proportion of central banks’ reserves will grow.

This is borne out by an HSBC survey conducted earlier this year of 77 central banks, which together manage more than half of the world’s reserves.

32 respondents indicated that they already hold investments denominated in renminbi; this is up from three in 2012. The findings also showed that the renminbi’s share of global reserves will rise to 7 per cent in 2020 and 10 per cent by 2025. Moreover, the central banks polled indicated they may invest up to 6.7 per cent of their reserves in the renminbi by 2025; this is up from 5.5 per cent from a year earlier.

Granted, central banks and reserves managers will not all buy renminbi assets overnight, but the trend is clear. In fact, the Monetary Authority of Singapore announced in June that it would include its renminbi financial investments as part of its official foreign reserves.

Array of assets

Meanwhile, the gradual liberalisation of China’s capital account is opening up new ways that overseas investors — including central banks — can buy into a widening array of RMB-denominated assets.

Take the recently-announced Shenzhen-Hong Kong Stock Connect scheme. This expands the list of Mainland-listed companies that overseas investors can trade in; it also widens the range of Hong Kong-listed stocks that Mainland investors can buy and sell.

Another area of opening-up is China’s domestic bond market. It is already the world’s third-largest, after the US and Japan, and there is huge potential for growth. China has systemically rolled out measures that increase the level of foreign participation in its bond market.

Last year China reopened the so-called panda bond market, once again allowing foreign entities to issue renminbi-denominated debt on the Mainland. In February this year, the authorities opened the China Interbank Bond Market up to investors such as foreign banks and pension funds. And just last month (August), the World Bank became the first entity to receive approval to issue SDR-denominated bonds in China.

In many ways, October 1, 2016, represented the culmination of more than a decade of change for what was once an almost exclusively domestic currency. But it is also the beginning of a new chapter: more change will come, as the renminbi moves steadily towards becoming a truly international currency that is used by companies, investors and individuals around the globe.

Peter Wong, Deputy Chairman and Chief Executive, HSBC Asia-Pacific