{"id":2018,"date":"2015-12-07T08:39:58","date_gmt":"2015-12-07T07:39:58","guid":{"rendered":"http:\/\/blogg.lnu.se\/china-research\/?p=2018"},"modified":"2015-12-07T09:10:48","modified_gmt":"2015-12-07T08:10:48","slug":"the-rmb-made-it-what-does-it-really-mean","status":"publish","type":"post","link":"https:\/\/blogg.lnu.se\/china-research\/?p=2018","title":{"rendered":"The RMB made it \u2013 what does it really mean?"},"content":{"rendered":"

China finally made it. The International Monetary Fund (IMF) has now met China\u2019s strong desire to get its currency \u2013 the renminbi (RMB) – accepted as the fifth currency of the IMF\u2019s artificial currency basket by the name of Special Drawing Rights (SDR). Until now, SDRs contain only the U.S.dollar, the euro, the yen and the Pound Sterling.<\/p>\n

Understandably, the Chinese are celebrating this event. Current Chinese enthusiasm reminds strongly of China\u2019s entry into WTO exactly 14 years ago. International or global recognition is something Chinese politicians really appreciate. One should also add that China\u2019s WTO entry – purely economically – most certainly was a much more important event than now becoming part of the SDR basket.<\/p>\n

For this reason, it is not quite easy to understand the strongly praising words by Christine Lagarde, the head of the IMF. Lagarde said among other comments that \u201cthe decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy in the global financial system\u201d. She adds officially that \u201cit is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China\u2019s monetary and financial systems.\u201d<\/p>\n

I have my doubts about the prestigious way of presenting the RMB inclusion in the SDR by the IMF. Why is there so much noise about this step from both the IMF, Western players on financial markets and journalists? The laudation may be justified later on retrospectively \u2013 but not under current conditions. Five questions or arguments make me skeptical.<\/p>\n

First,<\/em> SDRs have currently not really an important function as an international reserve asset. Their market share is only a few percent (read more on this by Maurice Obstfeld, \u201cThe SDR as an International Reserve Asset \u2013 What Future?\u201d, International Growth Centre, LSE, March 2011). Could it be the case that the IMF via the RMB entry now starts working for an active revival of this almost forgotten IMF tool? Something to remember: private institutions do not hold or use SDRs.<\/p>\n

Second, <\/em>has the RMB inclusion mainly happened for political \u2013 and not for economic – reasons?<\/p>\n

Third, <\/em>the presented glamour around the IMF decision puts too much emphasis on China\u2019s international <\/em>financial relations whereas the need of further domestic<\/em> financial reforms currently is much higher and more urgent \u2013 despite a number of improvements at home more recently, particularly when it comes to the processes of setting interest rates.<\/p>\n

Fourth, <\/em>how substantial are the accomplished improvements of the financial system – which Lagarde so strongly pointed at during the press conference \u2013 in Chinese reality? How much are they worth in relation to all the potential Chinese bad loans of the official and the shadow banking sector that we have so little information about? What about the real size of the local government debt? What about bubbles in the housing market and local industry parks? And where are the improvements in Chinese transparency that Lagarde has been talking about during the press conference? I haven\u2019t found very much myself, particularly not in the statistics that are analytically important to China and the rest of the world.<\/p>\n

Fifth, <\/em>it can be discussed whether RMB really had met the second criterion for joining the SDR which demands that the currency is \u201cfreely usable\u201d. I could not find any clear definition of what is called \u201cfreely usable\u201d in this specific Chinese context. Did I miss something?<\/p>\n

Initially, i.e. from October 2016 onward, the RMB is given 10.92 % in the revised SDR basket. The U.S. dollar received 41.73 % (before 41.90 %), the euro 30.93 % (before 37.40 %), the yen 8.33 % (before 9.40 %) and the British pound 8.09 % (before 11.30 %). China\u2019s new share seems to be relatively high, compared to both the euro, the yen and the British pound. And why did the euro and the pound lose that much ground whereas the U.S.dollar remained roughly unchanged? Sure, I know there is a revised formula for the share calculations. But how scientifically and statistically strong are the criteria of the components of the new formula? The information given by the IMF, however, still keeps a number of answers quite open. More research on this issue could be interesting (which I may deal with myself).<\/p>\n

I know from unofficial sources that the ECB has been very irritated about the considerably decreasing weight of the euro in the revised SDR basket. Information to the ECB about the forthcoming downgrading of the euro in the SDR system did obviously not work very well \u2013 an issue that the IMF probably could have handled more smoothly.<\/p>\n

To avoid misunderstandings, nobody can blame China for having tried and succeeded. That\u2019s not the point. The point is the insufficient transparency of the IMF in certain parts of the decision process. What about the theory that the IMF – by sticking strongly to this recognition of China – mainly intended to encourage China to speed up and\/or intensify further economic and financial reforms?<\/p>\n

Anyway, for the time being, financial improvements and reforms of the domestic financial system will be much more important to China\u2019s future than ambitiously deregulating the cross-border capital balance. Hereby, the issue of sequencing should not be forgotten \u2013 i.e. implementing the reforms in the right order (look here, for example at the works of S. Edwards and P-R Ag\u00e9nor).<\/p>\n

Still valid also for China: stability begins at home!<\/p>\n

 <\/p>\n

\"\"<\/p>\n

Hubert Fromlet<\/em><\/strong>
\n<\/em>Senior Professor of International Economics, Linnaeus University
\nEditorial board<\/a><\/p>\n

 <\/p>\n

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\n<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

China finally made it. The International Monetary Fund (IMF) has now met China\u2019s strong desire to get its currency \u2013 the renminbi (RMB) – accepted as the fifth currency of the IMF\u2019s artificial currency basket by the name of Special Drawing Rights (SDR). Until now, SDRs contain only the U.S.dollar, the euro, the yen and […]<\/p>\n","protected":false},"author":174,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13398],"tags":[],"class_list":["post-2018","post","type-post","status-publish","format-standard","hentry","category-china-2"],"acf":[],"yoast_head":"\r\nThe RMB made it \u2013 what does it really mean? - China Research<\/title>\r\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\r\n<link rel=\"canonical\" href=\"https:\/\/blogg.lnu.se\/china-research\/?p=2018\" \/>\r\n<meta property=\"og:locale\" content=\"en_US\" \/>\r\n<meta property=\"og:type\" content=\"article\" \/>\r\n<meta property=\"og:title\" content=\"The RMB made it \u2013 what does it really mean? - China Research\" \/>\r\n<meta property=\"og:description\" content=\"China finally made it. 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