China's Renminbi Added As A Main Global Currency

China’s renminbi currency was added to the reserve basket by the International Monetary Fund, a move that heralds the currency as one of the world’s elite but inserts a risk of volatility into the country’s transitioning economy.

Yesterday’s announcement by the IMF puts the Chinese currency on par with four others: the U.S. dollar, the euro, the Japanese yen and the British pound. The renminbi, which will be added to the IMF’s currency basket next October, is in line to be more widely used globally in matters of trade and finance.  

The decision, said IMF Managing Director Christine Lagarde, recognizes China’s efforts in past years to reform its currency and financial structure. “The continuation and deepening of these efforts,” she said, “will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.” The United State publicly supported the IMF’s approval.

To make itself eligible for IMF’s currency basket, China instituted a series of reforms to make the currency “freely usable,” including sharply devaluing it against the dollar back in August. Imports suffered greatly in China in part to due to the devaluation, declining 18.8% in October. A weak yuan makes more favorable conditions for exporting to countries like the U.S., and exports to the U.S. fell only .9% in October. The devalued currency added more uncertainty to China’s economy; its growth rate of 6.9% is the lowest since the end of the recession.

With the designation by the IMF, “the most likely scenario is that the renminbi will erode but not seriously rival the dollar’s status as the dominant global reserve currency,” Eswar Prasad, a former head of the IMF’s China division, told the New York Times.