By William Moore,
International Business Writer
This past Monday marked a landmark decision for the International Monetary Fund (IMF), which voted to use of the Chinese renminbi, or yuan, as one of the handful of main world currencies, as the New York Times reported. With this vote, the yuan joins the ranks of such other notable currencies such as the euro, the British pound, the Japanese yen, and the American dollar, as well as gold in being recognized with “Special Drawing Rights” or SDR.
As reported by the Guardian, the SDR system was launched by the IMF in 1969 to support a system of exchange rate management known as the Bretton Woods fixed exchange rate system. Units of SDR were allotted to the member states of the IMF to give them guaranteed access to a sort of “third party” stable currency that would be universally accepted on the world markets. This way, if a given country had to buy up their own currency in order to regulate their exchange rate, they would have access to a neutral currency that would allow them to make the transactions with other countries.
As Yahoo Finance reported, recognizing the yuan as one of the select currencies that are stable enough to be given SDR status is a major stamp of approval from the IMF, and it is likely to greatly increase the desirability of using the yuan to conduct international business, but all of this benefit did not come without a cost. The IMF only conducts a review of SDR currencies every five years. The last time they were up for review in 2010, the Chinese government applied to have the yuan entered as one of the SDR currencies, but were rejected because they did not meet the criteria of the IMF that state the currency must be “freely usable” within international markets. Following this, the Chinese government made several changes to the way their currency is used and overseen with the intent of making the yuan more reactionary to international economics. Throughout the past year in particular, China has taken a number of steps to adjust the yuan, including a devaluation of about 4 percent that will allow the currency to be more thoroughly impacted by shifts in the global markets. Taking steps such as these hurt the Chinese economy, which has had a difficult year partly as a result of actions such as these. Now that the yuan has received SDR recognition the Chinese government likely hopes that it will help to bolster their slumping economy.
As the New York Times reports, many economists believe the endowment of SDR status on the yuan will likely have many more political ramifications than it will serious economic ones. By acquiring SDR status, the Chinese economic system has gained a certain degree of prestige on a global scale. It is likely that China will attempt to use this status to market itself to countries that in the past would have conducted their business in western currencies when necessary. In addition, having the yuan as one of the internationally recognized SDR currencies will make it easier for certain Chinese-aligned nations to dodge sanctions imposed by the U.S. and her allies. Countries such as North Korea, who subsist almost solely on the trade they conduct with China, will find it easier to conduct business with other countries now that they have access to an internationally recognized currency that is not actively sanctioning them.
A version of this article appeared in the Tuesday, December 8th print edition.
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