IMF Designates Chinese Yuan as Reserve Currency

The International Monetary Fund has declared the Chinese yuan a reserve currency. It joins the US dollar, the euro, the British pound and the Japanese yen. This will boost the Chinese unit as a medium of exchange in global trade, and it is a recognition that China’s economy dominates east Asia. At the same time, the yuan does not have many of the features needed to act as a legitimate reserve currency. The IMF’s decision had less to do with what China has achieved as it does in preventing China from backsliding on its economic reforms.

The designation means that the IMF’s own unit of account, Special Drawing Rights [SDRs], will be composed of a basket that includes the yuan. The basket that makes up the SDR at present consists of the US dollar at 42%, the euro at 37%, the pound at 11% and the yen at 9%. Under the new weighting set to come into effect in 2016, the dollar remains unchanged, the euro falls to 31%, the pound and the yen both decline to 8%. Thus, the yuan will account for 11%. The IMF is essentially saying that China’s rise has come almost exclusively at the expense of the Europeans.

The head of the IMF, Christine Lagarde, stated that the designation is a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

China has liberalized its rigid control of the exchange rate recently, and the currency dropped painfully in August as a result. Bloomberg reports, “The decision should boost efforts by Xi to open up China’s financial markets. China implemented a series of reforms to win IMF support, such as opening its onshore bond and currency markets to foreign central banks and reporting its reserves to the IMF.”

However, the central bank still has serious issues with transparency, and the Communist Party retains a decisive role in using the currency’s exchange rate for political purposes. As a reserve currency under the IMF, the yuan will likely become a bigger tool for Chinese policy makers to use in foreign affairs.

The New York Times, which prefers the term “renminbi” to “yuan” (“sterling” versus “pound”), reports “As the renminbi becomes more deeply woven into the global economy, it undermines the ability of the West to impose financial sanctions on countries accused of human rights abuses and other violations, like Sudan and North Korea. Such countries can increasingly carry out transactions in renminbi.

“China contends that it is crucial to respect nations’ sovereignty and that leaders should be allowed to set policy without fearing international criticism or intervention. China remains a close business and financial partner of Sudan and North Korea. Mr. Xi invited the president of Sudan to a recent military parade in Beijing.”

The nationalists in America, especially those running for the White House as Republicans, may view this as a disaster. One expects to hear that it’s a sign of America’s decline. However, it is merely an acknowledgment f reality. China’s economy matters, and managing the rise of China in the 21st century must be done better than the rise of Germany in the 19th and 20th centuries was done.

As for the use of two different terms for the money, it’s actually a very effective way for Beijing to prevent people from discussing Chinese economic policy. Yet among themselves, the Chinese talk about “kuai” in the same way that Brits use “quid” or Americans use “buck.”