China is already the world’s second-largest economy, and now the country’s currency could join a list of the world’s most important reserve currencies, with the International Monetary Fund expanding its “currency basket” to include the yuan.
China is on the cusp of a milestone that its leaders have long coveted, as the International Monetary Fund decides Monday whether to include the yuan in the crisis lender’s so-called currency basket.
The chances look good for the move, which would put the Chinese economy into an exclusive club alongside the United States, the eurozone, Britain and Japan.
IMF chief Christine Lagarde has endorsed the acceptance of China’s yuan, as the Washington-based agency’s staff recommended. Observers expect the IMF’s executive board to vote favourably.
The currency basket is a daily average of the market exchange rates of the dollar, euro, yen and pound sterling, which is more stable than any of the individual major currencies alone.
The average is used as a measure of value for the IMF’s “special drawing rights,” which quantify how much reserve currency each of the 188 member countries can call on.
Economist Mei Xinju said the IMF decision shows China’s rising importance and another “step” in the yuan’s acceptance as a reserve currency.
Beijing’s policy of tying other countries to the yuan – using both the carrot of enticing profits and sometimes the stick of China’s growing economic might – has been bearing fruit.
China has forged currency swap deals with 39 countries, allowing greater use of the yuan for international payments, and Beijing is pursing ambitious trade links across Asia.
The yuan has now jumped ahead of even the yen to third place among the most-traded currencies.
International investors are increasingly buying into financial instruments denominated in yuan. A new German-Chinese financial market launched in November in Frankfurt, with 200 products all available in yuan.
Yet, globally, the yuan remains a pretender by some important measures: Nearly 45 per cent of international payments are still made in dollars, more than 27 per cent in euros and 8.5 per cent in pounds. The yuan accounts for only 2.79 per cent.
The Chinese government committed itself in October to delivering economic data that meets IMF standards, taking down what proved to be one of the final hurdles before the currency basket proposal.
The People’s Bank of China called it a “necessary step in reform and opening up, which will further improve China’s statistical transparency, credibility and comparability among different economies.”
However, analysts had earlier expressed concern about China’s surprise yuan devaluations in August after the Shanghai stock exchange lost around 40 per cent from a peak in mid-June.
Beijing then agreed in September with other members of the Group of 20 nations to “refrain from competitive devaluations, and resist all forms of protectionism.”
China’s potential breakthrough at the IMF is in part the result of major reforms in recent years, partly aimed at pushing back against US dominance in the global economy.
The currency basket decision comes as China’s economy, which for many years galloped at a growth rate topping 10 per cent, slows to an expected 6.3 per cent in 2016, according to the IMF’s projection.
China is settling into a more normal growth rate – which for the foreseeable future is still the envy of advanced economies everywhere – and rebalancing from excessive export dependence to more sustainable growth based increasingly on domestic demand.
For the yuan to continue to advance in world markets, the currency must become even more free from state control, expert Zhang Monan said.
The range within which the yuan is traded is still set largely by the central government.
Some observers expect the 2016 five-year plan to set a timetable for the currency’s value to be set entirely in the markets. But skeptics doubt if Beijing is ready to relinquish all control amid the uncertainty of a slowing economy.