Adding China's Currency to the IMF's Reserve Currency List

November 17, 2015Currenciesby EW News Desk Team

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After nearly two years of lobbying, the Chinese government finally learned this week that its currency would be part of the International Monetary Fund's special group of world currencies. Its currency, the renminbi, will now join a short list of the world's top currencies in the International Monetary Fund's basket of top currencies that also include the U.S. dollar, the Euro, the British pound, and the Japanese Yen.

The decision represents a huge moral victory for China, though the actual effect of the decision has a much less significant practical impact. The decision adds China's currency to those of other countries whose currencies make up the "Special Drawing Right." The typical use of the Special Drawing Right (SDR) in a practical sense allows the IMF and other lenders to draw up accounts using these currencies as their standard. However, from a symbolic standpoint, the currencies in the SDR have traditionally represented the most powerful currencies in global financial markets.

Thus, while gaining little practical benefit, China's inclusion ranks as a significant boost to national pride. Though others engaging in international borrowing will not necessarily be required to hold the Renminbi, inclusion on this list represents just how powerful China's economy has become.

Though currencies on this list have traditionally been "freely usable," critics point out that China's Renminbi has long been anything but that. However, the decision demonstrates just how far China has come in liberalizing its economy and currency. This allows the IMF to concede to Chinese pressure on this measure without significant danger and without losing face.

In order to achieve this honor, China has enacted a number of reforms over the last year, including loosening the central bank's management of the exchange rate, allowing foreign central banks the opportunity for unlimited investment in the domestic bond market, and establishing a market for three-month government bills (a technical IMF requirement).

According to Fortune, the vote to include the Renminbi in the SDR has generated some political prestige for the otherwise embattled Xi Jinping administration, which has struggled with a recession and failure to meet GDP growth targets. However, in a more practical sense, inclusion in the SDR may lure in foreign investors.

Chen Long of Gavekal Dragonomics in Beijing said of the decision: "Granting the renminbi the status of a 'global reserve currency' could indeed encourage more central banks and other asset managers to take a look at China's financial markets, especially the onshore bond market. But it would be wrong to think that central banks will be forced to buy substantial amounts of renminbi assets just because the currency is included in the SDR basket."