China’s renminbi will sit alongside the currencies of America, the European Union, Japan and Britain in the International Monetary Fund’s basket of currencies. This is something China has wanted for a while and it has been making some changes to get it in recent years. Monday’s move by the IMF puts a new spotlight on lingering shortcomings in the openness and transparency of China’s financial system, while raising questions as to how much this move can really change things.
Monday’s announcement, which is effective next year, is in one sense bureaucratic and esoteric. It’s easier to imagine it as a holiday dinner: the year China is finally upgraded from the kids table to eat with the grown-ups. (This is not a goofy analogy dreamed up in a haze of excessive turkey and whisky. I actually did run this by Matt Slaughter, dean of Dartmouth’s Tuck School of Business and a former White House economic adviser.)
“When you’re a kid, there is a moment when you cross that line of enjoying being with your little cousins to wanting to be at the grownup table,” Slaughter said. “The grownups set the rules. The grownups decide what the menu will be. In a very tangible sense, China is now more at the grownups table for policymaking than they were last week.”
But at that table, where the dollar, euro, yen and pound politely dine on roasted turkey, there has long been concern about China’s past naughty behavior, the economic equivalent of flinging peas across the room or hand-making mashed potato sculptures. China’s financial markets range from unwelcoming to downright hostile to foreign investors. Western bankers don’t always trust official Chinese economic stats. And many American politicians say China manipulates its currency value to help its exports.*
China watchers don’t expect that to all stop now that China’s currency is officially among the global elite.
“It’s not a full game changer. China is still, in many ways, a highly non-transparent economy. But it’s a positive step,” said Scott Kennedy, who directs the Project on Chinese Business and Political Economy at the Center for Strategic & International Studies.
China’s economy is quite different than it was 30 years ago, or even 10. But it hasn’t yet changed enough to satisfy the global financial system. Monday’s IMF move is a bet that shuffling the seating chart will encourage China to change more.
*Pesky economists like to point out that China’s currency has appreciated in recent years, but don’t expect presidential aspirants to curb their accusations, especially when they campaign in states with big manufacturing economies.