WHAT DOES IT MEAN THAT THE CHINESE RENMINBI WILL BECOME A RESERVE CURRENCY?

Personally, I believe that the International Monetary Fund might have had political motives in declaring the Renminbi a reserve currency.  Perhaps the Chinese might have made changes to how the currency is managed; however, the real answer will be reflected by how much global trade, in which China is not a participant, will be denominated in Renminbis.  At least in the beginning, I believe that there will be hesitancy on the part of many other countries.

On November 30, the IMF Executive Board declared that, as of October 1, 2016, the Renminbi would join the U. S. Dollar, Euro, Japanese Yen and British Pound in the basket of currencies, which is referred to as the “Special Drawing Right”.  More commonly, the term reserve currencies is used, rather than SDRs.

Elevating the Chinese currency to an SDR does make the job of the IMF easier and provides more flexibility to world financial markets, as well.  It also recognizes that the Beijing government has been reforming its monetary and financial systems.  Also, the U. S. reportedly agrees with the IMF decision. However, it will be up to the Chinese financial bureaucracy, between now and next October, to convince the global marketplace that it is, indeed, worthy of its trust.

In years past, China has maintained tight currency controls, and had even pegged (or tied) its currency to the Dollar, until quite recently.  The IMF, through this recent announcement, has declared that it considers the Renminbi to be “safe, reliable and freely usable”.  In order for the Renminbi to gain global acceptance, however, China must continue to reduce the tight regulatory controls that it maintains, and begin to provide greater transparency with regard to any legal protection.   Above all, the Communist Party must not interfere.  But, only time will tell how quickly the Renminbi catches on in the global trading.

The IMF’s announcement regarding the Renminbi is linked, as follows: http://www.imf.org/external/np/sec/pr/2015/pr15540.htm.

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  1. #1 by cheekos on December 2, 2015 - 4:15 AM

    If your broker tries to sell you any sort of a security–ETF, market-based CD or otherwise–that is based on the Renminbi, or any currency, I would suggest that you think twice–and then think some more. ForEx (foreign exchange) is an investment that is best left to the institutional investors.

    But, if you wish to tease him or her, just ask them to tell you about SDRs. I guarantee you that, if you read this short blurb, you will know much more about the subject than they will.

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