The International Monetary Fund Monday added the Chinese yuan to the basket of elite currencies comprising its lending reserve, marking a milestone in the country’s ascendancy as a global economic power.
Many China watchers say the IMF’s decision is in large part a political one designed to encourage stronger economic overhauls in the world’s No. 2 economy.
For the Chinese, it is a matter of prestige, a plank in Beijing’s strategy to elevate the country’s economic role in the global economy as it challenges U.S. political and economic dominance around the world. The yuan joins the dollar, euro, pound, and yen in the IMF’s reserve-currency basket.
A host of other factors will determine the yuan’s fate as an actual global reserve currency, which is a reliable and well-used foreign exchange asset that central banks stock to buffer against crises.
At this point, the IMF’s action has more symbolic value than practical importance to financial authorities and the markets. The IMF’s designation is purely for denominating its loans and isn’t an internationally-traded asset.
The pace of Beijing’s move to establish a market-determined currency; to deepen its financial system: to strengthen its economic institutions; and to secure healthier long-term growth will be the prime determinants for whether central banks—and investors—trust in the yuan enough to stock up their reserves with China’s currency.