IMF adopts China’s Renminbi as an international reserve currency

The International Monetary Fund has decided to include China’s Renminbi (RMB) as a reserve currency under the SDR basket of currencies. RMB’s inclusion in the SDR currency basket gives a symbolic status to the China currency.

A debate about the inclusion of RMB in the currency basket was going on over the last few years. In the IMF, the Quota review about the currency composition of the SDR basket was made few months ago and the Fund has postponed the decision on RMB, urging China to make further reforms on the currency and financial liberalization front.

Beijing has devised many political measures to promote the internationalization of RMB. It has adopted pressure tactics including continuous complaints about the West dominated international financial architecture while questioning the rule of Dollar.  Formation of Asian Infrastructure Investment Bank are supposed to have created big influence on the current RMB inclusion decision by the IMF. China has made bilateral agreements with its major trade partners for greater use of RMB to settle trade transactions.

Indian Origin IMF Economist, Eswar Prasad, who headed the IMF’s China team, hinted that IMF has given a little bit of concession to China while awarding the reserve currency status.  Prasad, who wrote a book  “Dollar Trap” about the dominance of US Dollar in the world monetary system has opined that “It is very clear that [IMF staff and management] were willing not to break the rules but to bend them,” Mr Prasad said. “Given how much the IMF needs China they did not have much choice.”

Many policy analysts highlight that though RMB is used for trade settlement in a notable manner, RMB denominated financial transaction is little.

The RMB inclusion will not have immediate direct impact on the growth prospects of the slowing Chinese economy. But it will facilitate China oriented economic transactions. Trade and investment flows will accelerate. Similarly, economic activities by Chinese companies will be boosted with the inclusion of the RMB. These are the intangible benefits of having a hard currency.