BEIJING, Dec. 2 (Greenpost) — The renminbi’s inclusion into the IMF reserve currency basket known as “Special Drawing Rights” does not mean the internationalization of the Chinese currency is a fait accompli. On the contrary, it only marks a new starting point for the yuan to become a popular global asset.
Amid the joy and excitement following the decision of the International Monetary Fund (IMF) to include the RMB in its SDR basket on Tuesday, some people have said entry itself proves the internationalization of the RMB is complete and is now a globally recognized reserve currency.
Much as we hope these people are right, giving the RMB prized reserve asset status does not mean the world’s central banks will immediately make a beeline to invest in the Chinese currency.
Though the RMB has met all the criteria from the IMF to merit a place in its basket, thanks to the Chinese government’s relentless push for its wider use on the global stage, further effort to liberalize the country’s financial market is necessary. Only a commitment to deeper financial reforms will convince the world that holding the RMB is the right choice.
The RMB became the world’s No. 2 currency for global trade finance in 2013. It overtook the Japanese Yen to become the fourth most-used world payment currency in August, only after the U.S. dollar, the euro and the sterling, according to the global transaction services organization SWIFT.
To meet the IMF’s “freely usable” criterion, Chinese authorities undertook a series of reforms in recent months, such as improving its foreign exchange rate system, opening up its interbank bond and forex markets, and improving data transparency by subscribing to the IMF’s Special Data Dissemination Standard (SDDS).
These efforts, often times painful, have paved way for the RMB’s SDR entry. However, it would be naive and potentially troublesome to believe that a currency joining the SDR basket will promise consistent popularity.
Take the yen as an example. Despite its SDR entry, the yen’s share in international reserves has been going down over the past three decades as its prolonged economic recession tarnished the currency’s attraction.
As we celebrate Tuesday’s SDR entry, a milestone for the RMB’s global march, we must take a moment and be clear-eyed about the challenges and responsibilities ahead. Thankfully, China is prepared.
Following the IMF decision, China’s central bank vowed to speed financial reforms and opening up to make positive contributions to global economic growth, financial stability and economic governance.
With China’s commitment to liberalizing interest rates, forex rates, and its capital account, a more liquid, transparent and investor-friendly market can be expected, which will further advance RMB internationalization. End