OPINION | China’s Yuan in IMF: A Boon or a Bane?

When the world still anticipates the decline of China faced by a new normal in economic growth concomitant with decades of debates over China’s ‘Yuan’ to be included in the elite basket of currencies, the International Monetary Fund’s (IMF) acceptance of Yuan to its reserve currency basket clarifies China’s emergence in the global economic power club

By Amrita Jash

When the world still anticipates the decline of China faced by a new normal in economic growth concomitant with decades of debates over China’s ‘Yuan’ to be included in the elite basket of currencies, the International Monetary Fund’s (IMF) acceptance of Yuan to its reserve currency basket clarifies China’s emergence in the global economic power club. 

Given China’s reform over the decades and its greater export-led economy and robust growth, on November 30, IMF granted yuan/renminbi with the prestigious designation of ‘Special Drawing Rights’ (SDR)- finally imparting global importance to renminbi to the stature of US dollar, Euro, British pound and Japanese yen.

But this esteemed recognition by the West-led IMF of the reforms made by China in terms its monetary and financial system, did come to China’s reputation basket with a recurring cost. That is, following the challenges faced to enter the World Trade Organisation in 2001 to that of finally becoming party to the IMF, China had to loosen its grip over the tightly controlled renminbi in order to meet the interests of the elite current basket. China acted aggressive in expanding yuan’s global clout by building trade hubs in Europe to that of developing a raft of renminbi-denominated bonds and commodity contracts. Of which, the most striking step taken by China was the abrupt devaluation of the renminbi by allowing the market forces to play a greater role- which created a volatility in China’s domestic economy as well as impacted the global market at large. In this view, Yuan’s entry in the elite basket came at the cost its devaluation- which is now considered as safe, reliable and freely usable global currency.

With this break of the IMF protocol on China’s inclusive currency, the central query lies in the understanding of ‘who needs whom more’- does the dragon need IMF more or vice-versa. Though on the surface, it broadly appears that China is more benefitted by getting accession into the IMF currency basket but there also appears an alternate perspective. Given the global economic influx, China’s economic stability has become a global need. It can be said so, as China’s economic growth and stability is deeply intertwined with that of global economic stability. Although US dollar still looms large in finance and trade, Chinese yuan has taken precedence over euro- making it a significant player in international finance. In this perspective, IMF’s decision to accommodate yuan in the economic power club is a strategic political decision. This can be strongly argued as after coming into effect in September 2016, renminbi will become one of the currencies to be used in the disbursement and repayment of international bailouts denominated in the fund’s accounting unit. China will be one of the prime actors to share the economic burden and safeguard the global financial stability. Given this accession, there remains no doubt that China which is often touted as an emerging economy has now emerged and is a significant player in the international monetary system as well as global economy. This also clarifies and dispels the ‘china threat syndrome’ as china with its economic rise has rather become a stakeholder in the international system. In this view, China’s greater role will also elevate China’s role as a responsible actor in the international stage.

 Image Attribute: RMB's share as an international payments currency / Source: Society for Worldwide Interbank Financial Telecommunication

Having said so, though addition of Yuan in IMF gives a significant impetus to China’s economic boost and an opportunity to expand its economic muscle against the US dollar. It is representative of China’s victory, which symbolises China’s ascendance and acceptance as a important global player. In addition, Zimbabwe's recent adoption of yuan as its legal tender further paved the way for internationalization of yuan. Besides, this elite recognition also invites certain challenges for China which will test its role as a responsible player. Of which, the most notable is that of maintaining its credibility by acting more transparent. Here, the most pressing issues will revolve around countries which are accused of human rights abuses and other violations. For instance, North Korea and Sudan, which are close financial partners of China and which carries out transactions in renminbi will now become an imminent challenge for China. As yuan now offers such countries to circumvent the western sanctions and get access to global financial system. Such complexities will impede China’s actions which itself now faces a limited set of choices. There is now a credibility cost that will incur if China takes a different path from the institutionalized normative structure.

In this gamut of global interests, it becomes pertinent to assess what China’s Yuan addition to IMF’s SDR mean for India. Broadly, it can be argued that Yuan in IMF provides an economic opportunity for India. First, one of the direct impacts will be felt in the trade relations between India and China. China is India’s largest trading partner, wherein the increasing trade volume is compounded by a widening gap of export-import, causing India to suffer the burden of trade imbalance. Here, the causal factor has been China’s depreciation of yuan resulting into over capacity of Indian market with Chinese goods compared to India’s imports. With Yuan in the SDR basket, China’s manipulation of currency will be restricted and thus, India can benefit from a standard currency value. This can help to reduce the trade imbalance, which significantly impacts India’s economic interests. Secondly, India’s over dependence on US dollar will get impacted. For India heavily depends on US interest calculus for its monetary policy. In this view, against the monopoly of US dollar, China’s Yuan will provide an alternative to India’s monetary choice- diversifying India’s economic policy. Thirdly, Yuan in SDR will also provide an opportunity to shift the dependence on Bretton Woods institutions to that of BRICS Bank as an alternative for seeking loans and other financial transactions. Thereby, holistically China’s Yuan in IMF acts as a boon for India in many significant ways.

With this dynamic systemic change, the query lies in whether China has become a normative actor in the international domain or will China by its ascendancy into the normative structure will change the rules of the international system. It is therefore, a crucial test of time to explore whether China will apply its logic of ‘socialism with Chinese Characteristics’ in changing the rules. Thus, the glass still remains half empty.

About The Author:

Amrita Jash (K-5665-2015) is Editor-in-Chief of IndraStra Global and is a Doctoral Scholar at the Centre for East Asian Studies (Chinese Division), School of International Studies, Jawaharlal Nehru University, New Delhi, INDIA

Cite This Article:

Jash, Amrita. "OPINION | China’s ‘Yuan’ in IMF: A Boon or a Bane?" IndraStra Global 02, no. 01 (2016): 0056. http://www.indrastra.com/2016/01/OPINION-China-Yuan-in-IMF-002-01-2016-0056.html. |ISSN 2381-3652| https://dx.doi.org/10.6084/m9.figshare.2064468