November 23, 2017
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China makes great leap forward in global currency platter
With the decision of the International Monetary Fund to keep Chinese Yuan in its global reserve currency basket, China has made it to the top, finally. Indeed, joining an elite club of global currency charter is not a small event to go unnoticed. There are many reasons to cheer about it as Yuan is going to be next international currency. At least, Asia has got an entry into the Euro Christian dominated global currency market. This is a great achievement for whole of Asia and also for Africa. For long time, countries in the region were looking for an escape from the heat of the Whiteman’s arrogance and economic muscle. The currency printing machines of the West have often decimated the economies of small and medium sized nations if they do not like a particular country. Every time a country seeks greater autonomy in choosing its own basket of foreign currency reserve there can be complications. Since it is an imperfect world, some would like to ensure their interests first. When Iran tried to accept Chinese currency or Japanese currency for oil and gas trading then the real war situation emerged. Similarly, when Myanmar some years ago tried to change its foreign currency reserve from US Dollar to other currencies then it was sent with an alarm that a war like situation can be launched against it. Even the real cause behind throwing out Saddam Hussein regime in Iraq is also being attributed to Iraq’s daring act of changing foreign currency reserve, or at least issuing an open threat about it. Overall, the IMF’s decision to accept China into this elite club is a benchmark decision. There are many occasions in the past when a country wants to get rid of its present foreign exchange reserve from one currency to another. Change is inevitable but not accepted happily by others.

Increasingly, there is a power shift as the economies of former colonial powers, now champions of protectors of moral values, are falling each passing day. It will not stop here unless they are totally bankrupt. At the same time, China is going to be the world’s largest economy by 2040 as per a British survey. Thus, how long the world can deny the rising status of Yuan. The Chinese RMB as a reserve currency is a simple acknowledgment of China’s economic potentiality which is not yet fully realized. Since China now accounts for more than 15 per cent of the global gross economic output, nearly triple what it was a decade ago, the IMF recognition of the power of Yuan could be a right choice. Indeed, there is no other option but to go ahead and recognize it sooner. Yet, inclusion of the RMB in the IMF basket is in large part symbolic, although there could be a grand strategy to check the power of Chinese currency in another way. The IMF uses the reserve basket to denominate its emergency loans, not to create an internationally traded asset. There is still a debate going on that whether the Yuan is embraced by the IMF as a reserve currency will depend on Beijing’s success in deepening its financial system and adding far greater transparency to the inner workings of its economy. This is not an easy task to overcome. The more China opens up its markets, the more it exposes its economy to the risk of capital flowing out. If China were to open up its markets more broadly, cooling growth prospects could turn such investor exodus into a stampede of cash out of the country, as many emerging markets have experienced in recent months. Then Chinese economy can also feel the heat as it happened to Europe. China should be joyful about the inclusion of Yuan in IMF basket but carefully study the impact of Europe when it challenged Dollar might with Euro.

Interestingly, there is a murmur that China may go for devaluating Yuan further although Chinese leadership has publicly denied about the necessity. In fact, several US lawmakers who have long castigated China for its currency policy criticized the IMF’s decision to include Yuan. Their argument is based on China’s alleged history of so-called cheating on its currency. No one knows how much is real and whether there is a game behind it. The US leaders have always openly sanctioned a war cry if there is a change of currency adoption. They normally show their discomfort with any new currency gaining entry into the Bretton woods turf. They argued that instead of isolating Chinese currency the IMF is choosing to reward China’s currency manipulation. They think this will bring further doom to international economic stability. On the other hand, failure to win IMF reserve currency status for Yuan would have also been an embarrassment for China’s leadership as it takes over the rotating presidency of the Group of 20 major economies next year. Now, this development of Yuan’s rising status is a welcome move which has been adopted by the global financial institutions but China will face greater scrutiny in coming time. If China fails to play it smart then it will have massive impact for China and Asian economies. There can be initial hitch but in the long run it can bring benefits. Once again, it will be watched with interest across the world that how China behaves when it becomes strong and more powerful.