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OpinionComment

Following IMF’s nod for the renminbi, it’s up to Beijing to decide when to lift all capital controls

Donald Gasper believes the IMF decision to use the renminbi as a reserve currency will strengthen the international monetary system, as China navigates its way to fully opening its capital account

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A labourer works on a construction site in Beijing. Many argue circumstances are far from ideal for China to consider lifting all capital controls. Photo: Reuters
Donald Gasper
The International Monetary Fund board meeting on November 30 may go down in history as helping to usher in a new world financial order. As widely expected, the meeting approved the inclusion of China’s currency, the renminbi, into the basket of currencies used to calculate the fund’s special drawing rights (SDR).
The renminbi’s inclusion in the currency basket will be moderately advantageous to China and a feather in its cap

Behind the scenes, a vicious rearguard struggle had been waged by those with a vested interest in maintaining the existing order. Maybe Washington had the jitters because the special drawing rights are potentially the basis of a new international reserve currency – they were once compared by the historian Charles Kindleberger to a neutral international language like Esperanto, which would put all the main parties on an equal footing.

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Virtually unknown before the financial crisis of 2008, special drawing rights came into the spotlight when Zhou Xiaochuan (周小川), the governor of China’s central bank, suggested the US dollar should be replaced by a truly international currency system based on the SDR, controlled not by any single state but by the IMF. Zhou, and many other economists, have argued that the dominance of the dollar was a major factor contributing to global imbalance and market instability in the build-up to the 2008 crisis.

READ MORE: The rise of the renminbi: How adding China’s yuan to IMF’s SDR basket will spur the currency towards further reform

China has since last year been lobbying to secure the recognition by the IMF of the Chinese currency as an official asset of the fund. Photo: EPA
China has since last year been lobbying to secure the recognition by the IMF of the Chinese currency as an official asset of the fund. Photo: EPA
China has since last year been lobbying to secure the recognition by the IMF of the Chinese currency as an official asset of the fund. Many Europeans believe that the renminbi could bring more financial stability to global capital markets that lack this, due to the US dollar losing much ground and the euro being weakened by the debt crises in the euro zone.

But Washington has been dragging its feet as it fears the inclusion of the renminbi could just be the thin end of the wedge, opening the way to a weakening of US influence.

READ MORE: Six key things to know about the vote on China’s yuan joining the IMF basket of currencies

A decision on the renminbi has been continually put off. This is despite the fact that the issue was thoroughly considered at the G7 finance ministers’ meeting in Dresden in May this year, where support was given to the inclusion of the Chinese currency in the SDR basket.

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