Evaluating Yuan Inclusion in the IMF Special Drawing Rights Basket
Yucheng Lu
Abstract: After the IMF’s recent review on its Special Drawing Rights (SDR), the Chinese Yuan (RMB) became the fifth currency to join the SDR currency basket. The RMB has seen an increase in use in global trade, although many, including opportunistic politicians, criticize China’s manipulation of currency markets. This article analyzes the validity of the IMF decision according to the organization’s SDR currency selection criteria and discusses the potential ethical problems of the decision.
Introduction
In its 2015 November meeting, the International Monetary Fund approved the inclusion of the Chinese Renminbi Yuan (RMB) in the International Monetary Fund (IMF) Special Drawing Rights (SDR) currency basket, despite China’s long history of capital controls. The SDR is “not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.” (IMF) The IMF’s decision gives countries some confidence in holding RMB as part of their foreign reserves. (Economist) Eventually, the RMB will play a greater role in global markets and the world will have an alternative reserve currency. Some dispute the potential benefits of the inclusion of RMB, because of the belief that inclusion of a currency issued by an authoritarian government increases risk to the current international economic system. It therefore, is helpful to determine if the IMF decision is ethical.
This paper evaluates the IMF’s decision from an ethics perspective and describes the IMF’s reasons for Yuan SDR inclusion. The paper finds the decision is ethical in terms of outcomes and intention.
Comparing China
China, a rapidly developing nation, is different politically and economically from other SDR currency issuers. From an economic perspective, the rest of the SDR countries are highly developed markets while China is not, even if it has achieved remarkable progress in economic growth in the course of 30 years. The country is still classified as an Upper Middle Income nation despite its economy expanding over 2400% since 1980. (World Bank) The impressive growth is a result of former president Deng Xiaoping’s “Reform & Opening up” policies. The following chart demonstrates China’s economy catching up with Western economies from 1960 to 2015.
Although the current-price Gross Domestic Product (GDP) of the other 4 economies fluctuated in most of these years, Chinese data show relatively smooth and high economic growth. With its current economic expansion rate, the country will supplant the United States as the largest economy in the world. (Jacob)
A justification for the IMF’s decision to include the RMB in the SDR basket is increasing economic interdependence between China and the rest of the world. The Economist released its innovative index of relative revenues earned in the Chinese market by some of the S&P 500 listed companies. The index has constantly outperformed the S&P 500 index, indicating a growing share of income of the big U.S. companies from China. (Economist) The inclusion of the RMB is thus partly based on the assumption China will be a leading contributor to the global economy.
Mr. Yucheng Lu is pursuing his Masters in Economics at New York University.
