China's rise to the international stage is for domestic audiences only


IMF adds China's yuan to SDR

On the 30th November the International Monetary Fund (IMF) decided to include China's renminbi in its basket of elite global currencies or Special Drawing Rights (SDR). The new weights place the Chinese renminbi (10.92%) behind only the US dollar and the euro in terms of importance, with the newcomer leapfrogging ahead of both the British pound and the Japanese Yen.

China's rising international status

The immediate impact of the decision is likely to be fairly limited with the new weights only coming into play from 1st October next year. Even without the delay, few goods or services are priced in SDRs and China's inclusion in the basket seems to be largely for show. Andrew Walker, the BBC World Service economics correspondent has said 'More than anything this move is a symbol - a powerful one - of China's meteoric rise, from poverty to pillar of the global economy.'

However, all the talk of China's new place on the international stage fails to appreciate the drama playing out at home. Far from the western perception of a well-drilled army of technocrats, marching to the beat of Beijing's drum, China's government suffers from the same entrenched interests that any political system does. 

Real impact is domestic

It is for this reason that Arthur Kroeber, Managing Director of GaveKal Dragonomics, has argued that Beijing's real motivation in pushing to join the SDR was not 'as many media reports inaccurately suggest, a desire to make the renminbi a major global reserve currency. Rather, it was to force the pace of China's own financial deregulation.'

At the weekly State Council meeting on the 4th December Xing Yujing, head of a monetary policy department at the People's Bank of China (PBOC), echoed these sentiments marveling at the remarkable and rapid internationalization of the renminbi 'especially over the last ten months.' This has been no where more prominent than this August when, on Tuesday 11th, China's shock devaluation of the yuan, weakened the currency against the US dollar by almost two basis points. The official explanation given by the PBOC was that the move was a 'one-off' adoption of a market based approach to setting the yuan's value. However, the widespread perception at the time was that this was actually a desperate bid to revive a flagging economy. Timing is everything, however, and despite the weak export data that had come out over the weekend, just the previous Tuesday the IMF had issued a report which stressed that, with regards to its requirement that the renminbi be 'freely usable', 'significant work' was still needed to be done. In fact, at the press conference announcing the yuan's inclusion, IMF Director Christine Lagarde emphasized that, 'the renminbi's inclusion in the SDR is a clear indicator of the reforms that have been implemented and will continue to be implemented'.

Chinese reforms: two speeds.

The significance of the yuan's inclusion in the IMF's SDR then, is not for the symbolism abroad but rather its role in catalyzing aggressive financial reforms at home. As the Paulson Institute's Houze Song has described, reforms in China are at two speeds 'moving fast in banking and finance... but very slowly, if at all, in the real economy.' The hope in central government is that opening up Chinese financial institutions to foreign competition will force them to be more efficient in their capital allocation and in turn raise China's productivity. For a country suffering from bloated SOEs and debt-laden 'zombie' companies, reforming the real economy remains a monumental challenge but perhaps, with a little international assistance, it can be done.