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China's Renminbi Is Approved by I.M.F. as a Main World Currency
The Chinese renminbi was anointed as one of the world's elite currencies on Monday, a milestone decision by the International Monetary Fund that underscores the country's rising financial and economic heft.
The move will help pave the way for broader use of the renminbi in trade and finance, securing China's standing as a global economic power. Just four other currencies — the dollar, the euro, the pound and the yen — have the I.M.F. designation.
But the path to the I.M.F. decision, a bumpy process that stretches back years, also introduced new uncertainty into China's economy and financial system.
To meet the I.M.F. requirements, China was forced to give up some of its tight control over the currency, culminating in the abrupt devaluation of the renminbi that shook global markets in August. The changes could inject fresh volatility into the country, at a time when its economy is already slowing.
The I.M.F. designation, an accounting unit known as the special drawing rights, bestows global importance.
Many central banks follow this benchmark in measuring their reserves, which countries hold to help protect their economies in times of trouble. By adding the renminbi to this group, the I.M.F. effectively says that it considers the currency to be safe, reliable and freely usable.
It is a "recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," Christine Lagarde, the managing director of the I.M.F., said in a statement in Washington. "The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy."
The designation is a point of pride for Beijing, which had made it one of its highest economic policy priorities.
In the months before the fund's decision, China moved aggressively to expand the currency's standing on a global stage, building trading hubs in Europe and developing a raft of renminbi-denominated bonds and commodity contracts. In devaluing the currency, China changed the way it sets the value of the renminbi each morning, allowing market forces to play a bigger role.
The I.M.F. decision also says a lot about the waning influence of Europe: The renminbi is mainly replacing part of the euro's role in the special drawing rights. Assessing currencies for the accounting system, the fund put a greater emphasis on their different roles in international finance. The dollar still dominates in finance and trade, while the renminbi is quickly gaining ground on the euro.
The United States Treasury said it "supported" the I.M.F. decision.
Besides its symbolic weight, the I.M.F. label, which will take effect at the end of September next year, carries specific benefits. The renminbi will become one of the currencies used in the disbursement and repayment of international bailouts denominated in the fund's accounting unit, like Greece's debt deal.
The renminbi's new status "will improve the international monetary system and safeguard global financial stability," President Xi Jinping of China said in mid-November.
While the renminbi may gain favor internationally, the I.M.F. designation does not mean that China's economic overhaul is complete. China maintains heavy regulatory control over the country's financial system. The country also falls short in legal protections, with the Communist Party continuing to play a strong role in deciding court cases.
Such issues could limit the overall appeal of the renminbi — and China's ambitions.
"It is a historic moment in international finance for an emerging market economy, with a per-capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world's major reserve currencies," said Eswar Prasad, a former head of the I.M.F.'s China division who is now the Tolani Senior Professor of Trade Policy at Cornell University. But "the most likely scenario is that the renminbi will erode but not seriously rival the dollar's status as the dominant global reserve currency."
The changing currency dynamics also create new geopolitical concerns.
As the renminbi becomes more deeply woven into the global economy, it undermines the ability of the West to impose financial sanctions on countries accused of human rights abuses and other violations, like Sudan and North Korea. Such countries can increasingly carry out transactions in renminbi.
China contends that it is crucial to respect nations' sovereignty and that leaders should be allowed to set policy without fearing international criticism or intervention. China remains a close business and financial partner of Sudan and North Korea. Mr. Xi invited the president of Sudan to a recent military parade in Beijing.
"As the renminbi rises, countries will have more choices about where they do their banking — and how to potentially circumvent sanctions," said Christopher Brummer, a Georgetown University law professor specializing in currencies.
Beijing's effort to position the renminbi as a rival to the dollar traces back to the innocuously named "Document 217."
The Chinese central bank posted the document on its website with little fanfare in August 2010. But buried in the document's technical jargon was an important measure with global implications.
Under a new rule, China would start allowing other countries' central banks to begin buying its bonds in Shanghai. Officials in other countries just had to get permission first from the People's Bank of China.
Nigeria was paying close attention. Lamido Sanusi, the governor of the Central Bank of Nigeria, had already been mulling whether to park part of the country's $40 billion in foreign exchange reserves in renminbi.
A prominent Islamic scholar, he was the son of an influential Nigerian prince who served as his country's ambassador to China during the Cultural Revolution. Back then, his father advocated a shift by Africa away from Western dominance and toward closer relations with China.
When Mr. Sanusi became the central bank chief in 2009, Nigeria had extensive trade ties with China. In shifting a portion of reserves, he bet — correctly, as it turned out — that the renminbi would appreciate. Interest rates on renminbi-denominated bonds were also several percentage points higher than yields on comparable Treasuries.
Nigeria started purchasing large sums of renminbi in the little-regulated Hong Kong market in 2010, rather than Shanghai as the Chinese rules prescribed, and without seeking Beijing's permission. Mr. Sanusi then stunned the Chinese government by mentioning at a conference a few weeks later in Nigeria's capital, Abuja, that his country was ready to put up to a tenth of its entire reserves, or $4 billion, into renminbi.
"The Chinese Embassy came over and met me," said Mr. Sanusi, who last year was crowned Emir Muhammadu Sanusi II, the traditional and religious leader of Kano State in northern Nigeria. "They just wanted to have clarity."
Chinese officials, he said, were pleased that a major trading partner in Africa liked the renminbi. But Nigeria's move also posed a dilemma. Large-scale purchases of renminbi by overseas central banks would make it more difficult for China to prevent the renminbi from appreciating, which in turn would make exports less competitive.
When Nigeria eventually requested permission to buy bonds in Shanghai, the Chinese central bank agreed, although it tightly capped the purchases. "We got something less than what we applied for," said Lamido Yuguda, the director of reserve management at the Central Bank of Nigeria, declining to provide precise figures. "It was something we could live with."
After the experience with Nigeria, China moved slowly and cautiously on further currency liberalization over the next four years. The government did not encourage other central banks to buy large sums of renminbi. Instead, China entered into a series of swap agreements with dozens of countries like Australia, Brazil, South Africa, Germany and Iceland.
Under these agreements, China said it would provide billions of renminbi if the other country needed them in a crisis. But China would keep the renminbi until that point, so that any interim purchases would not be sufficient to push up the value of the currency.
Beijing's cautious strategy backfired this year, when China ramped up its campaign for I.M.F. reserve status. One of the I.M.F.'s main considerations is that the currency be "freely usable."
The People's Bank of China acknowledged last spring that other central banks held a modest $108 billion worth of renminbi, about 1 percent of total foreign exchange holdings by central banks. By contrast, central banks had $500 billion worth of swap agreements to obtain renminbi, more than for any other currency, including the dollar.
Beijing lobbied hard through the spring to persuade the I.M.F. to consider the swaps as evidence that the renminbi was "freely usable." But the United States and other countries opposed bending I.M.F. rules.
The fund decided during the summer to stick to more traditional criteria, like the amount of currency that central banks had been able to buy and how easily the renminbi could be traded. After that, the I.M.F. pressed the Chinese central bank to make its currency more responsive to market forces.
China had to move fast. After this year, the next chance to push the renminbi into the fund's accounting system would not come until 2020.
During the summer, Chinese officials made a series of rapid-fire moves, most notably devaluing the currency by 4.4 percent against the dollar as part of a new method for setting the daily trading range of the renminbi. The process would give the market more influence over the daily value of the renminbi, which is set each morning by the central bank.
The aftermath of the devaluation has been a shock to China's system, providing a window into the uncertainty the country now faces with a more globally oriented currency.
After the devaluation, many Chinese companies moved to pay off foreign debts for fear the renminbi would fall further. Investors also sold huge sums of renminbi and switched into other currencies. China's central bank spent nearly $100 billion in August alone to prop up the renminbi.
"Making it more market-based makes it more difficult to manage," said Larry Hu, the chief China economist in the Hong Kong office of Macquarie Capital Securities. "But making it more market-based also makes it more efficient."
[Source: By Keith Bradsher, The New York Times, 30Nov15]
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|This document has been published on 15Dec15 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.|