The Road to Freedom – for the Chinese Renminbi

A few weeks ago the IMF leader, Christine Lagarde, put out a press release saying that she was going to recommend to the IMF board that the Chinese currency, the renminbi, be admited as one of the currencies that make up the basket of currencies known as the SDR.  The SDR is the IMF-specific currency (special drawing rights) that is used by member states to settle exchange balances and to fund a loan-program that can be used (i.e. drawn) when and if a state is in financial difficultly, such as an intractibe trade balance.  The UK drew on its SDR from the IMF in the 1970’s, as reported in a recent book review of the period: See Decline to Fall – The Making of British Macro-Economic Policy and the 1976 IMF Crisis.  

The IMF board meeting takes place today and the US print edition of the Financial Times reports that the board will likley pass the measure and change: See Renminbi set for elite currency status.  The addition of the Chinese currency is mostly symbolic – as the SDR is not freely used by trade or commerce by private organizations or citizens.  However, the FT article suggests a point of conflict: some market watchers suggest the IMF is bending its rules to accomodate China – the currency is not freely floating in the currency markets.  The Chinese authorities, through the tight control of the operation of its central bank, controls its currency and manages its exchange value, especially agains the dollar.  The Chinese authorities have been taking steps to open up its currency, for sure, but it remains very limited compared to the dolllar, euro, sterling and yen.

One market watcher concedes that the move by the IMF is political – which the IMF refute.  Clearly it is political – the currency is not a free currency – so how else can this decision be argued?  The basic requirements for inclusion in the basket of currencies are not actually being met.  But the move was always going to happen at some point.  But I am quite surprised that it happened so quickly.  I had not thought it would happen for a couple of years.  The move is risky but it does open up the oppotunity for more Chinese cash to flow.  

The next big hurdle will be riskier: how rich countries, flush with trade surpluses, recycle their funds by aquiring Chinese renminbi-deonominated debt and – at the same time – the lowering of demand for US dollar-denominated debt.  This step is not a one-off step change or decision  but a slow process that will be observed over a period of time, that will have ramifications for interest rates around the world.  Hold on to you hat’s, ladies and gentlement.  It’s going to be a bumpy ride!

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