China Marks a Reform Milestone

Buried in the maelstrom surrounding the terrorist attacks in Paris, International Monetary Fund staffers recommended on Friday that the Chinese renminbi join the IMF’s Special Drawing Rights basket of currencies.

There are two requirements for a currency to be accepted into this elite echelon: it must be, in the words of IMF director Christine Lagarde, widely used and freely usable.

While the currency has been by any metric widely used for a while now, Friday’s announcement was seen as a validation of recent Chinese economic reform efforts. Despite recent tumult in the Hang Seng, China has taken some measures such as opening its bond markets foreigners in an effort to liberalize.

The United States has signaled that it respects and supports the IMF’s decision. According to the Financial Times, the Treasury released a statement saying, “As we have previously stated, we intend to support the renminbi’s inclusion in the Special Drawing Rights basket provided the currency meets the International Monetary Fund’s existing criteria.”

Many see SDR inclusion, which has little practical economic significance, as an acknowledgement of the growing role China plays in the global economy. While the yuan, according to an August IMF report, still trails major benchmark currencies in use in official reserves, debt holding, and currency trading, President Xi Jinping has continued to push through reforms that haven’t necessarily been popular in all corners of the Chinese economic establishment.

Ultimately, many analysts think China’s ultimate goal is to have the yuan displace the U.S dollar as the “global reserve currency.” This is still far off as today’s investors overwhelmingly see the dollar as the more secure asset. However, if China were to continue to liberalize its capital flows, the yuan could be a serious contender to for global supremacy.

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