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Categorized | Currencies

IMF gives strong backing to renminbi

Posted on November 30, 2015

Chinese one-hundred yuan banknotes are stacked for a photograph at the Korea Exchange Bank headquarters in Seoul, South Korea, on Thursday, Feb. 27, 2014. Photographer: SeongJoon Cho/Bloomberg©Bloomberg

The IMF on Monday gave a major vote of confidence to China and its reform efforts, giving the renminbi greater weighting than the yen or pound as it included the RMB in its elite basket of reserve currencies.

The vote by the board to make the RMB the fifth currency in the basket used to value the IMF’s own de facto currency followed months of deliberation at the fund and years of lobbying by a Beijing eager for the recognition.

    “The RMB’s elevation to the club of elite global reserve currencies is a big step for China and a significant one for the international monetary system,” said Eswar Prasad, professor of economics at Cornell University and a former IMF China mission chief.

    The renminbi will become the third biggest currency in the “special drawing rights” basket when it takes effect on October 1. The move is largely symbolic but Christine Lagarde, the IMF’s managing director, called it a major “milestone” in China’s economic reform “journey” and its integration into the global financial system.

    For China, the move is a validation of efforts over the past few years to liberalise financial markets and free up flows of funds into and out of China’s capital markets. In this regard, the IMF’s decision could strengthen the credibility of Beijing’s economic reformers against more conservative elements in the Xi Jinping administration.

    “It is a historic moment in international finance for an emerging market economy, with a per capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world’s major reserve currencies,” said Prof Prasad.

    But for the world’s financial system, the integration of China into the elite club of SDR currencies represents a significant challenge. The pre-existing SDR members are all western democracies with fully convertible currencies and open capital markets that are governed by the rule of law.

    China is different in every aspect; a developing nation ruled by a Communist party that has striven to limit the convertibility of its currency and shelter its domestic capital markets from foreign capital and influence.

    But the US, the IMF’s largest shareholder, said it had supported the decision to include the RMB.

    It marks the most significant change in the IMF’s basket since the euro replaced the Deutsche Mark and the French Franc in 1999.

    The US dollar will remain the biggest currency with a 41.73 per cent weighting followed by the euro with 30.93 per cent. But with a 10.92 per cent share the RMB will trump both the yen (8.33 per cent) and the pound sterling (8.09 per cent).