Thoughts From Across the Atlantic

An Important Step for China and the World

On 30 November the Board of the IMF decided to include the Chinese RMB in the Special Drawing Rights (SDR) basket from 1 October 2016. SDR is the unit used in transactions between IMF member states and the Fund. RMB will thus become the fifth currency in this basket of global reserve currencies, joining the U.S. dollar, the euro, the Japanese yen and the British pound.

To be included in the SDR basket, a currency has to fulfill two criteria – it has 1) to be  issued by a major trading nation and 2) to be freely usable. Given the rise of China as one of the world’s leading trading countries, it fulfilled the trade criterion already during the previous review of the SDR basket that took place five years ago. Taking into account the increased trading volumes of the RMB in the foreign exchange market, its growing use in international borrowing and the actual and promised reforms aiming at liberalization of China’s capital account, the RMB is now also deemed to satisfy the “freely usable” criterion.

The Chinese currency joining the club of global reserve currencies is certainly a substantial achievement for China. Other than being a matter of prestige, it is likely to result in improved access to financing and lower interest rates for Chinese borrowers. It should also encourage further opening of China’s capital account. The new status for the renminbi can be seen as a reward to China’s top central banker, Zhou Xiaochuan, who promoted reforms in spite of opposition from powerful domestic interest groups. For investors from across the globe it would bring additional investment opportunities at a time of historically low interest rates. However, foreign private investors will be influenced by the extent of further liberalization of capital controls and by greater transparency of central bank operations.

The opportunities also bring with them a corresponding set of risks. In the past financial market and capital account liberalization has often been followed by a foreign-lending driven boom that has resulted in a bust and a painful period of decline or low growth and dealing with the imbalances created. The substantial net foreign assets that China has accumulated as a result of past current account surpluses certainly provide some safety in this respect, but it remains to be seen whether China will be able to learn from the past mistakes of others and avoid committing similar mistakes on its own. Appropriate macroprudential measures are very important in this respect.

China’s policy toward the renminbi exchange rate is another remaining issue. The IMF has urged a movement toward a market-determined exchange rate, but China continues to manage its exchange rate. The People’s Bank of China faces the same policy trilemma as all central banks. Concerning the three policy goals of inflation, the exchange rate and capital flows, the bank can achieve any two of the goals, but not all three. Allowing the RMB to float would allow China to target an inflation rate and have free international capital flows.

Until recently, possible economic problems in China could have affected the rest of the world mainly through the trade channel. For example, decreasing investment volumes in China would result in less demand for investment goods produced by some European Union countries, most notably Germany, which would in turn mean less intermediate exports to Germany from Central and Eastern Europe. From now on, however, developments in China increasingly will have the potential to affect the global economy also through the financial channel. What appears to be a diversification opportunity could also become a source of additional risk.

In addition to the above, it is striking that the inclusion of the RMB in the SDR basket has mainly taken place at the expense of reduced weights of the euro and the British pound while the weight of the U.S. dollar has remained almost unchanged (Reuters). Thus, the rise of China, at least from the financial perspective, is taking place at the expense of a relative decline of Europe while the U.S., at least for the time being, is able to preserve its position. This should be food for thought for European policymakers, which hopefully results in a set of actions to make Europe a more attractive place for business and investment.


Reuters. 2015. IMF gives China’s currency prized reserve asset status. November 30.

Wall Street Journal. 2015. “Yuan’s new status to pressure Beijing.” November 30.

32 Responses to “An Important Step for China and the World”

ElyseDecember 20th, 2016 at 9:44 pm

It’s a wonderful tool for both owners and those looking to buy or rent.

Today they are either leftover laws from these time periods or have been reintroduced by a state according to need.

Whether the property is taken care of by the owner or

a property manager, open a conversation about how maintenance is handled.

madden 17December 23rd, 2016 at 10:41 am

It’s actually very difficult in this active life to listen news on Television, thus I simply use internet for that purpose, and obtain the hottest information.

VernDecember 23rd, 2016 at 7:05 pm

As a man ages, his testosterone levels decrease which ccan leazd to a numbr of problems, generally relzted tto his sexual functions.

dental practiceDecember 24th, 2016 at 5:01 pm

I do agree with all the ideas you’ve introduced for your post.

They’re really convincing and will definitely work. Nonetheless, the posts are too short for newbies.

May you please prolong them a little from subsequent time?

Thank you for the post.

MontyJanuary 16th, 2017 at 1:11 am

Fantastic goods from you, man. I’ve take note your stuff prior to

and you are simply too wonderful. I really like what you have got here, really like what you are stating and the way in which wherein you say it.

You are making it entertaining and you still care for to stay it wise.

I cant wait to read much more from you. That is really a terrific web site.

samilfood.comJanuary 18th, 2017 at 12:31 pm

Have you ever thought about writing an ebook or guest authoring

on other websites? I have a blog centered on the same topics you discuss and

would really like to have you share some stories/information. I know my visitors would value your work.

If you’re even remotely interested, feel free to shoot me an e-mail.

JoniJanuary 19th, 2017 at 2:29 am

What’s up, this weekend is fastidious in support of me, as this moment i am reading this great educational article

here at my home. 19th, 2017 at 3:57 am

Excellent post. I was checking constantly this blog and I’m impressed!

Extremely helpful info specially the last part :) I care for such information much.

I was looking for this particular info for a very long time.

Thank you and good luck.

KraigJanuary 20th, 2017 at 2:59 am

Ahaa, its good conversation on the topic of this article

here at this web site, I have read all that, so at this time me also commenting here.

credit card debtJanuary 20th, 2017 at 7:28 pm

It’s a pity you don’t have a donate button! I’d definitely donate to this excellent blog!

I suppose for now i’ll settle for book-marking and adding your RSS feed to my Google account.

I look forward to brand new updates and will talk about this website with my Facebook group.

Chat soon!

KaseyJanuary 21st, 2017 at 10:04 am

Hey there! Would you mind if I share your blog with my myspace group?

There’s a lot of people that I think would really

appreciate your content. Please let me know. Thank you

word audioJanuary 21st, 2017 at 2:39 pm

you are truly a excellent webmaster. The website loading

velocity is amazing. It seems that you are doing any distinctive trick.

Moreover, The contents are masterwork. you’ve done a fantastic job

on this topic!

business mentoringJanuary 22nd, 2017 at 12:45 am

I believe that is among the such a lot significant info for me.

And i am satisfied reading your article. But should observation on few

general things, The website style is perfect, the articles is in reality nice

: D. Good activity, cheers

Leave a Response