China checked off one of its top priorities as an emerging economic superpower as the International Monetary Fund on Monday announced it will be including the Chinese yuan in the elite basket of world currencies it uses to help finance its work around the world.
The yuan, also known as the renminbi, will join the dollar, the British pound, the euro and Japanese yen in the basket of key global currencies that back the IMF’s “special drawing rights” (SDRs), the financial instrument the world body uses when it makes emergency loans to its nearly 190 member-nations.
It’s the first addition to the prestigious ranks of world “reserve” currencies since the euro replaced the German mark and French franc 15 years ago. Some are predicting the move puts China’s yuan on track to be one of the world’s top three currencies, alongside the dollar and the euro, by 2030.
Beijing has long lobbied for the upgrade, both as a matter of prestige and for the added clout it provides in world currency and financial markets, boosting the demand — and thus the price — for yuan-denominated assets and for investments in China’s internal market.
Financial experts say the yuan’s upgraded status could also ease China’s passage from the current export-driven economic model to one that focuses more intensively on domestic development, services and customer spending.
But the move could bring greater scrutiny for Chinese monetary policy, which has faced sharp criticism from the United States and other economies for artificially raising the value of the yuan to boost China’s exporters and for failing to be more transparent about its operations. That scrutiny has only increased after a series of stock market shocks and slowing growth rates this summer that have raised questions about the government’s ability to micromanage the economy.
The IMF decision was not unexpected, as IMF experts had concluded in an August analysis that the yuan was “freely tradable” and met the criteria for being included in the SDR basket.
IMF Managing Director Christine Lagarde said in a statement that the yuan’s inclusion was “a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”
The immediate market impact is not expected to be large, but central banks around the world will likely be far more ready now to hold at least a portion of their reserves in yuan, and the long-term payoff could be much larger, according to analysts.
The move is also seen as, in part, a political challenge by China to the long dominance of the global economic and financial system by the United States and its allies.
The renminbi’s rising prestige could prove a complicating factor for the U.S. and its allies by giving hostile regimes such as North Korea and Iran an alternative currency in which to conduct business, putting them theoretically beyond the reach of some financial sanctions imposed by the West.
And China’s critics say the move came despite what they said was clear evidence that Beijing was still manipulating the value of the yuan to benefit its exporters and drive up its trade surplus.
“The IMF is choosing to reward China’s currency manipulation instead of combating it,” said Sen. Charles E. Schumer, New York Democrat and a leading critic of China’s policies on Capitol Hill. “This decision is an affront to the millions of U.S. workers who have lost their jobs at the hands of China’s rapacious trading practices, and sends a terrible signal to the rest of the world that currency manipulation is acceptable behavior in the eyes of the IMF.”
But the Obama administration has not opposed the IMF decision, with the U.S. and IMF pressing Beijing to take a number of steps to merit membership in the club.
China in August relaxed its controls to briefly allow the value of the yuan to float at market prices, and a month later announced foreign central banks would be allowed to participate in its domestic foreign exchange markets. In another reform move, the cap set by the central bank on the rate savers can get on bank deposits was lifted.
According to the IMF, the yuan will represent just under 11 percent of the weighting in the new currency basket for the SDRs. The U.S. dollar, currently representing 41.9 percent of the basket, will not be affected, but the slice of the new SDR pie represented by the euro will decrease.
• David R. Sands can be reached at dsands@washingtontimes.com.
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