The International Monetary Fund on Monday anointed China’s renminbi as one of the world’s leading currencies in a historic decision.
The designation, an accounting unit called special drawing rights, means the renminbi will become more broadly usable in global trade and finance, while China solidifies its position as a global economic power.
Central Banks throughout the world use this benchmark to measure reserves meant to protect economies during times of crisis.
In letting China into the club, the I.M.F. is effectively saying that it believes the renminbi to be safe, reliable, and freely usable. The perk will also allow the renminbi to become of the currencies used in disbursing and repaying international bailouts denominated in the I.M.F.’s accounting unit. These disbursements include the Greece debt deal.
Although the renminbi is still falling short of the dollar on the world stage, experts note it’s quickly sizing up to the euro.
Earning this status has been one of China’s priorities in recent years.
In the months before the I.M.F.’s decision, Beijing took several steps to prop up the renminbi globally. It opened trading hubs in Europe and launched the development of renminbi-denominated bonds and commodity contracts.
To hit its target, however, Beijing had to make some sacrifices such as loosening its tight regulatory grip on its economy in order to give the market more influence. In August, it devaluated the renminbi against the dollar by 4.4. percent giving the market a larger role in determining the daily value of the renminbi, which is set by China’s central bank every morning.
Devaluation of the renminbi rattled global markets and enticed some Chinese companies to rapidly pay off debt in fear that the renminbi will fall. Investors also bought large amounts of renminbi and switched to other currencies.
“Making it more market-based makes it more difficult to manage,” said Larry Hu, the chief China economist in the Hong Kong office of Macquarie Capital Securities, in an interview with the New York Times. “But making it more market-based also makes it more efficient.”
The I.M.F. seemed to take notice.
I.M.F. Managing Director Christine Lagarde in a statement said the fund’s decision resulted from a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”
She added, “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.”
This milestone, however, does not mark the end of China’s economic overhaul. The country maintains tight regulation of its financial system and even court decisions are heavily influenced by the ruling Communist Party.
Be the first to comment