The inclusion of the Chinese currency into the International Monetary Fund’s Special DrawingRights basket will not only help China’s financial reforms but the evolution of the internationalfinancial system, according to IMF officials and think-tank economists.
Zhang Tao, the new deputy managing director of the IMF, said inclusion of the Chinesecurrency, the renminbi, makes the composition of the SDR basket more representative of thecurrencies being traded in the world.
“The RMB’s inclusion will make it more attractive as an international currency, contributing togreater risk diversification,” Zhang told a forum on Chinese economics on Wednesday at thePeterson Institute for International Economics in Washington.
Zhang assumed his current post on Aug 22, replacing Zhu Min, also from China.
A former vice-governor of the People’s Bank of China, the central bank, Zhang said theinclusion of the RMB will also strongly support China’s continued efforts to reform itsmonetary, foreign exchange and financial systems.
“It will help facilitate the country’s increased integration in the global financial community,” hesaid.
He believes the inclusion will help consolidate the process of RMB internationalization, addingthat experience shows that currency internationalization can encourage the development ofdeeper and more liquid financial markets.
“It can deliver more predictable macroeconomic outcomes, assist the development of strongand credible institutions and secure the integrity of the markets,” he said.
Zhang said that while these will be not achieved overnight, they can be crucial for China’scontinued emergence as a source of economic growth and financial stability.
In November, the IMF executive board announced its decision to include the RMB in the SDRbasket. That took effect on Saturday. The decision makes the RMB a new member in abasket of four other currencies — the US dollar, euro, British pound and Japanese yen.
Italian economist Fabrizio Saccomanni, a distinguished visiting fellow at the PetersonInstitute, described the RMB’s inclusion as an important recognition of China’s growing role inthe world economy and international monetary system.
He also described it as an important gesture by the international community to approachsome kind of distribution of power in international financial institutions, an objective that’sbeen pursued for some time and finally materialized.
“China’s entry into SDR is implicitly a commitment that it will continue to move towardfinancial integration and opening its capital markets, which is certainly a process in themedium term,” said Saccomanni, who had served as deputy governor of the Bank of Italy andas Italy’s minister of economy and finance from 2013 to 2014.
Fred Bergsten, senior fellow and director emeritus of the Peterson Institute, said the USshould warmly welcome the RMB.
“This is a historic development. It’s a very important part of China’s overall rise as a globaleconomic power, a reflection of China’s willingness to accept increased responsibilities as aleader of the international economy and international monetary system. I think it’s whollydesirable,” he said.
Bergsten believes it’s historic for another reason. It’s the first case in which a nationalcurrency is becoming a global currency at the behest and initiative of the issuing country. Hesaid the US dollar, the British pound sterling, Japanese yen and the euro were all chosen bythe markets, adding that some issuing governments were even reluctant to see their currencyplaying much of an international role.
“So I think China is breaking new territory here in actively seeking various responsibilities inan orderly and very timely way in an international role for its currency. I think it’s historic inthat sense,” he said.
Bergsten warned his Chinese counterparts in the audience to be ready for someunanticipated consequences.
“Somebody might even start manipulating your currency one of these days as you play theinternational role,” he said.
Bergsten proposed the creation of an SDR Council, or SDR5. He said that people who worryabout international governance have thought for many years about how to form a newgoverning organization that includes many advanced countries along with China.
“They try to expand G7, but China does not like that. Some in the G7 do not like that either,”he said. “But this is a natural opportunity.”
He added that the council could be either inside or outside the IMF to work for the evolution ofthe international monetary system.
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