IMF recognizes Chinese currency as global
The International Monetary Fund has recognized the reality of China’s place in global finance by adding the Chinese currency to its global basket of currencies.
An IMF announcement on 30 November said the Renminbi (RMB) will be added to its Special Drawing Rights (SDR) basket which includes four other international currencies.
The IMF said the value of SDR will be based on a weighted average of the values of the currencies, and other sources said the RMB would be weighted at a value of 10.92, which is below the US dollar and the euro, but above the British pound and Japanese yen.
The change in the international status of the Chinese currency in terms of the Bretton Woods financial institutions, which is effective from 1 October 2016, recognizes the RMB (also called the yuan) as a major reserve currency. The IMF reviews its basket of currencies at five-year intervals, and rejected the RMB five years ago in 2010, saying the currency did not meet its criteria, which are essentially two: volume of international trade and use of the currency in international trade.
China without doubt has the largest volume of international trade, but only 2.5% of tabulated international trade uses the Chinese currency, due to lack of recognition as a tradable currency, and RMB is used only in transactions involving China. For comparison, while the US dollar is used for US trade, it is used mainly for trade involving third parties. But on 30 November, the IMF said the Chinese currency now meets the “freely usable” standard, and that trading is up significantly in two of three international time zones.
Recognition of the currency globally is more than symbolic and, while not an objective of Chinese economic policy, is another step towards a globally traded currency.
A main result could be that countries in Africa will accept the RMB for exchange.
A contributor to forbes.com said this announcement tells us that the IMF, and by extension the world financial community, believes in China as “an unarguable top tier player in the global economy; that it supports China’s efforts to internationalize its currency; that it believes in Beijing’s process of economic reform.” Sanjiv Shah, the chief investment officer of Sun Global Investments says, “The longer term impact of the event will be more significant as it will lead to a greater use of the yuan in international transactions.”
A Japanese holding company and consulting firm, Nomura, said that it expects the RMB to pass the yen and sterling within five years in terms of its level of usage in world trade, and join the dollar and euro by 2030.
“After years as the world’s largest exporting nation,” said Nomura, “China is now attempting to export the ultimate ‘Made in China’ product: the Renminbi.” The founder of Hao Capital, Charles Liu, while positive about the impact of the decision, told China Central Television (CCTV) that recognition of the RMB by the international financial institutions is “belated” and “begrudging”.