The news that the International Monetary Fund (IMF) has formally decided to include the Chinese currency, the renminbi, in its Special Drawing Rights (SDR) cheered many in the Chinese capital. For at least five years, the Chinese government has waged a lobbying campaign with the IMF and taken steps to make the renminbi, which is not a hard currency, more freely usable outside China.
But for most others, this development elicited less excitement than yawns or puzzlement.
Such reaction is understandable. The SDR is not an international currency, but a basket of currencies created by the IMF as a supplementary reserve asset for national central banks. With the admission of the Chinese renminbi, an SDR is now made of bits of the U.S. dollar (41.7%), the Euro (30.9%), the Japanese yen (8.3%), the British pound (8.1%), and the renminbi (10.9%).
A total of 204.1 billion SDRs (with a value equivalent to $285 billion) have been “created” and distributed to IMF members, but they cannot be used as a form of payment in international commerce. SDRs can only be used by central banks to calculate the value of their foreign exchange reserves.
Besides the prestige associated with membership in this elite currency club, the only practical benefit for China for inclusion in SDR is that foreign central banks will hold the renminbi (more likely renminbi bonds) in their currency reserves. However, since the renminbi constitutes only 10.9% of total SDRs, the direct economic payoff for China would be the purchase of about $31 billion in renminbi by foreign central banks.
In the short-term, such purchase could help push up the value of the Chinese currency.
But China may not even reap this modest reward. Currency traders anticipating the IMF’s move have bid up the renminbi while the People’s Bank of China (PBOC) has also been propping up the renminbi ahead of the IMF’s decision. Understandably, Beijing did not want to embarrass the IMF or itself with a falling renminbi. Now that China is safely in the SDR club, the renminbi will most likely face renewed downward pressure.
In the commentary on the renminbi’s inclusion in the SDR, too much attention has been focused on the practical significance of the development (not much), and too little thought has been given to the motives of the Chinese government. If, as argued by most economists, China’s membership in this club is merely symbolic, the question is why Beijing has invested so much in getting into it?
Despite the generalized perception that government policy in China is driven by a coherent strategy conceived by far-sighted leaders, individuals with entirely different agendas can be found in the corridors of power in the Chinese capital. In the case of gaining admission into SDR, three objectives lay behind Beijing’s thinking.
The simplest motive is international prestige. Top leaders of the Chinese Communist Party (CCP) are eager to show their people that, thanks to their hard work, China has gained previously unimaginable international status and recognition. To have the Chinese currency treated as an equal to the mighty U.S. dollar is one way to do that. For these officials, admission into SDR is the end of their quest.
The second motive, harbored by the more geopolitically minded leaders of the CCP, is to compete against the U.S. dollar as the world’s top reserve currency. They have long resented the strategic clout the U.S. has derived from the dollar’s dominant status in global finance.
The seigniorage benefits—the right to mint a global currency that people in foreign countries will hold without charging interest—are another prize they would like to claim. For these officials, the SDR is merely the first step. Encouraged by the IMF’s move, they are likely to support additional moves that will make the renminbi more widely usable as an international currency.
The third motive, associated with reformers frustrated with the slow pace of change in China’s banking system and capital markets, is to use international pressure to force China to adopt more market-based monetary and exchange rate policies.
In pushing for admission into SDR, these reformers succeeded in obtaining political support from the other two groups for allowing reforms that loosened capital controls and made the renminbi more flexible. China’s success in gaining SDR admission, this group hopes, will strengthen their case for additional measures. Their argument is that, to fully realize the potential benefits of SDR membership and make the renminbi a truly usable international currency, China needs even more reforms.
At the moment, it appears that the coalition of geo-strategists and reformers may enjoy the upper-hand in Beijing even though, to borrow a Chinese proverb, they dream different dreams while sleeping in the same bed.
Minxin Pei is the Tom and Margot Pritzker 72’ Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States
