Monday’s announcement from the IMF to include the Chinese renminbi into the Special Drawing Rights (SDR) should be celebrated in China and recognised by the world as a sign of what is yet to come. The next five years should bring more successes and realisations from four decades of reform.
In March 2009 Zhou Xiaochuan, PBoC Governor at the time, wrote an essay suggesting that the SDR, an IMF unit of account required to comprise a fraction of members’ foreign exchange reserves, should challenge the dollar’s status as a global reserve currency. That is still a distant prospect. But Monday’s IMF announcement to include the Chinese renminbi into the SDR marks a significant step towards a more balanced global financial system.
This favourable international recognition increases the incentives for the Chinese authorities to accelerate further down a path of reform which reaches back to the late 1970s; when Deng Xiaoping became paramount leader of China and the country first issued bonds to fund a vision of economic reform. It will also lean further government support towards the reformist camp who face ongoing but weakening opposition amongst the ranks.
The decision to assign the renminbi a 10.92% weighting, effective 1st October 2016, was even higher than many were predicting but in line with recent IMF staff allusions that it would at least be a “double-digit one”. It was also very close to the 10.5% we began touting in 2012 as a suitable starting weight. As expected, the methodology for calculating the weights was adjusted - to place equal emphasis on exports and a composite financial indicator (comprising FX reserves held by other monetary authorities, FX turnover, and international bank liabilities and debt securities in their currency). This of course affected the renminbi’s potential weighting greatest (which would have been around 16% under the last quinquennial’s methodology) and resulted in a composition of 41.73% dollar, 30.93% euro, 10.92 renminbi, 8.33% yen and 8.09% sterling. The next SDR review is scheduled for September 2021 by which time the renminbi is certain to gain further importance and weighting as the consequences of this week’s decision begins a virtuous cycle.
Some pundits were surprised to see the renminbi leapfrog the yen and sterling, but given the already dominant position China has ascended to over recent years, such a pretext - to not upset the Japanese - would have been too hard for even the IMF’s statistical wizards. Yet the Japanese have the consolation prize of overtaking the British who are now the least important currency in the basket.
This will probably not leave too much of a bitter taste for London who have adopted an ambitious but perhaps somewhat subservient attitude towards the eastern superpower in recent days; aggrandising the recent visit of President Xi Jinping, leading the charge in international issuance of RMB bonds, stepping out as the first major western supporter of AIIB and even giving Chinese names to beloved landmarks. Britain certainly does not want to kowtow, letting the Chinese believe they can destabilise western unity, forgo human rights responsibilities or overreach into the South China Sea. It is clear however that they are more afraid of how easy it could be to stand idly by amidst this wave of opportunity. Likewise investors and other nations that fail to follow and adapt to China’s progress may find themselves left behind as the heart of the global economy shifts eastwards.