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IMF gives "thumbs up" to RMB internationalization

Editor: Li Kun 丨CCTV.com

12-02-2015 16:08 BJT

By Tom McGregor, CNTV Commentator

The Chinese currency, remninbi (RMB), is ready for "showtime." The International Monetary Fund (IMF) will allow the yuan to join Special Drawing Rights (SDR) in its special reserves basket on Oct. 1, 2016. The US dollar, euro, British pound, and Japanese yen currently account for the other currencies in the basket.

 

SDRs are deemed "safe reserve assets" during geo-political and economic crises. Central Banks rely on such currencies to maintain the monetary system and safeguard financial stability.

"The IMF's executive board decided that the remninbi qualified for the SDR basket under existing criteria," Shanghaiist quotes IMF Managing Director Christine Lagarde as saying. "It’s a recognition of the significant reforms of the Chinese economy."

Charting a path of reform

Beijing's journey to bring RMB to the SDR basket was difficult, since certain criteria had to be met, which included: strong exports market and "freely-usable" currency. China held sway as a global exports powerhouse, but struggled to gain "freely usable" currency status.

The People's Bank of China (PBOC) had imposed tight restrictions on daily yuan exchange rates' spreads along with rigid controls over interest rates. The IMF mandated liberalization on both matters. The PBOC made proper adjustments in recent months to ensure the RMB can win acceptance from the IMF.

"It is the right time to enter the yuan in the SDR basket," Nicholas Lardy, senior researcher for Washington-based Peterson Institute of International Economics., told Xinhua.

Welcoming RMB internationalization

The RMB's rise has tremendous symbolic meaning for emerging markets, where their economies continue to expand at faster rates than developed nations but they hold less influence in diplomatic circles.

"It is a historic moment in international finance for an emerging market economy," said former head of the IMF's China division, Eswar Prasad. "(China) with a per-capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world's major reserve currencies."

A nation must undergo necessary stages to internationalize its currency: Being used as an international trading settlement, turning into investment currency and treated as reserve currency.

Meanwhile, Beijing has expanded domestic financial markets to lure more foreign investors into China. It's now easier for foreign companies to make electronic RMB funds transfers into the country via CIPS (China International Payment System).

Challenges lay ahead

The yuan's status as a major reserve currency could spark wider exchange rate fluctuations, while the PBOC would lose some control over the currency.

China's finance markets, such as the Shanghai Stock Exchange must open up more to foreign traders buying and selling Chinese shares, which would boost liquidity but lead to more dramatic fluctuations in the stock market.

"If the yuan wants to gain the trust and confidence of the market, China needs to become an economy and a financial system that can accept large and free movement of inflows and outflows and has depth and breadth with a variety of financial instruments," Lardy said.

Global China moves forward

China is headed towards a ‘New Normal’ for its economy. The era of double-digit GDP (gross domestic product) annual growth rates appears to be over. China is transforming into a more dynamic and developed market that relies on the services sector, which requires RMB internationalization to succeed.

It's a big risk, but Beijing is rolling the dice to set the nation up for greater global prestige.

Tmcgregorchina@yahoo.com


( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )

 

 

Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.


 

 

 

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