RMB Joins the IMF Currency Basket
On October 1st, China’s National Day, the renminbi (RMB) joined the US dollar, the Japanese yen, the British pound, and the euro in the IMF’s currency basket, heralding its eventual emergence as a reserve currency of choice for many coutnries .
However, RMB internationalization expert Eswar Prasad, a professor at Cornell University and a former head of the China Division at the IMF, argues, and I would tend to agree with him, that it will be a long while before the RMB becomes entrenched as an international reserve currency.
Mr Prasad told the press, “It’s happening before the RMB actually becomes a major reserve currency. It seems like the IMF is getting a little ahead of the game. But part of the reason the IMF is doing this is to bring China into the fold, so to speak, and acknowledge that China has become a great economic power. The currency still has a long way to go, though.”
“Traditional attributes of a reserve currency—open capital account, flexible exchange rate—are not there for China yet. It’s become a reserve currency just because China is so important in terms of world GDP and world trade … It accounts for about 13% of the world trade and it’s been the biggest contributor to global growth. So it’s largely size that’s driving this as if now”, he said.
“If China doesn’t stumble in terms of growth, if they continue with their economic and financial market reforms, make the currency more market determined, open up the capital account, it could very well rival the Japanese yen, the pound sterling, and perhaps even erode the euro share to a significant extent,” he said. “It will start playing a significant role in the Asian region and perhaps another region such as Africa and Latin America, which are very tied in to trade with China.”
Another factor holding back renminbi from top status is that the country’s financial markets and institutions aren’t as transparent as those of other major currencies, argues Prasad.
“China’s not there yet in terms of its financial market development and in terms of its data and government transparency,” he said. “So I think that is a long way to go even for the renminbi.”
– Yahoo Finance