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The International Monetary Fund (IMF) made headline news this week by designating China’s currency, the renminbi, one of five “special drawing right” currencies, which may increase its use globally. Since China’s currency policy has often been a source of international political tension, we asked David Singer, associate professor of political science at MIT and a leading expert on currency politics, to explain the implications of China’s new currency status.
Q. What is the significance of the IMF’s announcement?
A. The IMF announced that the renminbi will be included in the basket of currencies that make up the “special drawing right” (SDR), a reserve asset created by the IMF in 1969. This decision has both symbolic and practical significance. Symbolically, the IMF has raised the status of the renminbi by placing it in the same category as the dollar, euro, yen, and pound, which together have made up the SDR basket since it was last updated in 1999. The practical significance is that the IMF’s decision constitutes a “seal of approval” that could prompt greater global use of the renminbi by central banks, other financial institutions, and multinational corporations. The benefits to China could be immense: lower borrowing costs on sovereign bond markets, greater profits for Chinese financial institutions, and easier access to capital for Chinese firms and households.
Over the past several years, China has made it easier for foreign central banks to buy and sell renminbi and for investors to purchase renminbi-denominated bonds. Moreover, China has gradually adjusted its exchange-rate policy from a strict dollar peg to today’s policy of allowing market forces to play a greater role. Many observers believe that China must undertake many additional reforms to foster an open economy with deep and liquid financial markets, but the IMF’s decision constitutes an official acknowledgement that the renminbi has already become an important “freely usable” global currency.
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