{"id":27437,"date":"2015-05-26T16:36:57","date_gmt":"2015-05-26T14:36:57","guid":{"rendered":"http:\/\/www.w-t-w.org\/en\/?p=27437"},"modified":"2015-05-26T23:31:03","modified_gmt":"2015-05-26T21:31:03","slug":"27437","status":"publish","type":"post","link":"https:\/\/www.w-t-w.org\/en\/27437\/","title":{"rendered":"Will the Renminbi Join IMF’s Basket?"},"content":{"rendered":"
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Lee Jong-Wha writes:\u00a0 By the end of this year, the International Monetary Fund will decide whether the Chinese renminbi will join the euro, the Japanese yen, the British pound, and the US dollar in the basket of currencies that determines the value of its international reserve asset, the Special Drawing Right (SDR).<\/p>\n

The IMF created the SDR in 1969 to supplement existing reserve currencies, thereby providing the global financial system with additional liquidity.<\/p>\n

To qualify for inclusion, the Chinese government has eased its capital controls and liberalized its financial markets considerably. Yet the US, in particular, reluctant to welcome China into the fold.<\/p>\n

This is all the more problematic given that the 2008 financial crisis laid bare the international reserve system\u2019s inadequacy when it comes to ensuring sufficient liquidity for emerging economies.<\/p>\n

This continued vulnerability reflects a collective failure to reform the global monetary system. \u00a0China has championed a transition to a multi-currency reserve system, in which the SDR and an internationalized renminbi would be used more widely, including in countries\u2019 currency reserves. But its attempt in 2010 to add its currency to the SDR basket failed, because the renminbi was not \u201cfreely usable.\u201d<\/p>\n

Since then, China has implemented a series of reforms to increase the renminbi\u2019s usage in foreign trade and direct investment, as well as in cross-border financial investment. Fourteen renminbi-clearing banks have been established worldwide<\/p>\n

Chinese policymakers have signaled further financial liberalization by removing the domestic cap on banks\u2019 deposit rates, thereby giving overseas institutional investors easier access to capital markets. The PBOC is also likely to widen the currency\u2019s trading band and move toward a more flexible exchange-rate regime.<\/p>\n

As a result of these efforts, the renminbi has emerged as the second most used currency in trade finance.<\/p>\n

Of course, China stands to gain much from the renminbi\u2019s emergence as an alternative international reserve currency.<\/p>\n

But China must confront significant risks. Capital-account liberalization and renminbi internationalization invite potentially volatile cross-border capital flows, which could, for example, trigger rapid currency appreciation.<\/p>\n

Even if China manages to mitigate such risks, unseating the US dollar as the dominant global currency will be no easy feat. Inertia favors currencies that are already in use internationally, and China lacks deep and liquid financial markets, an important precondition that any international reserve currency must meet.<\/p>\n

If, however, China succeeds in developing a more convertible capital account and bolstering its financial system\u2019s efficiency, the renminbi is likely to emerge as a new international reserve currency, complementing the US dollar and the euro.<\/p>\n

For now, China is focused on winning the renminbi\u2019s inclusion, even with a small share, in the SDR currency basket. The IMF\u2019s major shareholders should seriously consider it. The renminbi\u2019s continued internationalization, not to mention further progress on critical financial reforms, would contribute to the creation of a more stable and efficient global reserve system.<\/p>\n

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Lee Jong-Wha writes:\u00a0 By the end of this year, the International Monetary Fund will decide whether the Chinese renminbi will join the euro, the Japanese yen, the British pound, and the US dollar in the basket of currencies that determines … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":22,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-27437","post","type-post","status-publish","format-standard","hentry","category-finance"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t