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Great Expectations for the Renminbi

SHANGHAI – The International Monetary Fund’s recent decision to add the Chinese renminbi to the basket of currencies that determine the value of its reserve asset, the Special Drawing Right, has captured headlines around the world. But the SDR itself has not exactly dominated discussions – much less transactions – since its creation in 1969. So does the decision really matter?

In fact, given the SDR’s very limited role in the global economy, the move will have few concrete effects in the short term. In the longer term, however, the attention the decision has attracted could spur wider use of the SDR. More important, at least for now, the decision amounts to an endorsement by the IMF of the progress China has made toward renminbi internationalization, while reflecting – and reinforcing – China’s growing economic clout.

Since China joined the World Trade Organization in 2001, its GDP has surged from about CN¥20 trillion ($3.1 trillion) to CN¥60 trillion. In 2009 China became the world’s largest exporter. And last year, according to the IMF, China overtook the United States to become the world’s largest economy (in purchasing power parity terms). The acknowledgement by the IMF board, which represents all 188 of the Fund’s member countries, that the renminbi meets “all existing criteria” for inclusion in the SDR basket is another step forward along this path of progress.

It is important to note, however, that meeting “all existing criteria” does not place the renminbi on par with, say, the US dollar – or, indeed, with any of the other SDR currencies (the euro, the British pound, or the Japanese yen) – in terms of international usage. On the contrary, despite China’s massive GDP and trade volume, the renminbi’s share in the global foreign-exchange market remains negligible. And the process of internationalizing the renminbi is far from complete.