FT
China knocks on door of reserve currency club
The internationalisation of China’s renminbi faces its stiffest test yet as the International Monetary Fund debates whether to endorse the “redback” as a reserve currency alongside the dollar, euro, yen and sterling.
Becoming a constituent in the IMF’s Special Drawing Rights basket would be a big step forward for the currency, which remains tightly controlled by Beijing. Economist Louis Gave of GaveKal Dragonomics likens the move to Japan’s currency liberalisation in the 1980s and the subsequent run-up in yen assets.
“Very quickly, global equity and bond investors were chasing their own tails, pushing up the value of the yen together with Japanese equity and bond valuations to regular new highs.” (From which, of course, they subsequently retreated as the bubble imploded.)
However, the rewards for Beijing would be more than simply financial: acquiring SDR rights would be a powerful boost to its geopolitical ambitions.
“For China, SDR basket inclusion is symbolic to global recognition of its rise in status,” Paul Mackel, head of Asia forex research at HSBC, wrote in a recent report. “The very stringent requirements for currency inclusion in the SDR serve as a quality assurance to global users that the currency in question is indeed very liquid and stable as a store of value.”
That will feed into the IMF’s deliberations. “The crux of the matter is that this is ultimately going to be decided on political rather than economic merits,” says Eswar Prasad, economics professor at Cornell University and former China country director for the IMF.
China’s bid for more influence in the international monetary system began at the peak of the global financial crisis in March 2009, when central bank governor Zhou Xiaochuan published a paper in English titled “Reform the international monetary system”.
Mr Zhou argued that the global financial crisis had exposed the vulnerabilities of over-reliance on the dollar, and proposed beefing up the SDR so it could serve as “an international reserve currency that is disconnected from individual nations”.
In March this year Chinese Premier Li Keqiang told IMF managing director Christine Lagarde that China intended to accelerate reforms needed to meet the criteria for SDR inclusion.<snip>
