Following IMF’s nod for the renminbi, it’s up to Beijing to decide when to lift all capital controls
Donald Gasper believes the IMF decision to use the renminbi as a reserve currency will strengthen the international monetary system, as China navigates its way to fully opening its capital account
Behind the scenes, a vicious rearguard struggle had been waged by those with a vested interest in maintaining the existing order. Maybe Washington had the jitters because the special drawing rights are potentially the basis of a new international reserve currency – they were once compared by the historian Charles Kindleberger to a neutral international language like Esperanto, which would put all the main parties on an equal footing.
READ MORE: The rise of the renminbi: How adding China’s yuan to IMF’s SDR basket will spur the currency towards further reform
But Washington has been dragging its feet as it fears the inclusion of the renminbi could just be the thin end of the wedge, opening the way to a weakening of US influence.
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A decision on the renminbi has been continually put off. This is despite the fact that the issue was thoroughly considered at the G7 finance ministers’ meeting in Dresden in May this year, where support was given to the inclusion of the Chinese currency in the SDR basket.
Opponents of inclusion have been saying the renminbi needs to be fully convertible on the capital account before the currency can be included in the SDR basket, although such a requirement is not obligatory, according to current IMF rules. These state that to be included in the basket, a currency must be that of a major trading nation and be freely usable.
The decision on full convertibility is something for China to make by itself, free from outside pressure. Many argue that current circumstances are far from ideal for the country to consider lifting all capital controls.
READ MORE: Beijing has confused yuan’s inclusion in International Monetary Fund’s Special Drawing Rights with winning a beauty contest
On the other hand, the renminbi’s inclusion in the currency basket will be moderately advantageous to China and a feather in its cap. Analysts believe that it will result in global demand for the renminbi gradually reaching US$500 billion. Some think demand could grow to as much as US$1 trillion.
The IMF’s decision will make the SDRs more representative and attractive and strengthen the international monetary system. In the words of China’s central bank, it will be “a win-win result for China and the world”.
Donald Gasper is a Hong Kong-based journalist and commentator