Is the RMB exchange rate the real issue for China’s entry in the SDR basket?
What must China do more, to be part of the SDR basket ? Chinese’s economy is third by nominal GDP after the US and the Euro Area. It’s second by commercial exchange volume. It’s first by foreign exchange reserves with more than $3.7 trillion. But this is not enough for the West to accept the Renminbi as part of the SDR basket. The key issue seems to be the RMB exchange rate.
China’s exchange rate has been for long time kept artificially undervalued. Its currency hasn’t been sufficiently correlated to the enormous surplus of the trade balance. In the last three years Chinese government has made some efforts to remedy to this issue. First, the range of the Renmimbi’s fluctuation has been widened. Second, the financial market has been slowly opened to the foreign investors. Third, some strong efforts have been made to internationalize the Renmimbi through different type of exchange agreements with different central banks around the world. As a result of these policies, the RMB exchange rate has been strengthened principally against the USD but also against the other major currencies.
Now the geostrategic outlook of the Chinese government is to make the Renminbi an important reserve currency and also a vehicle currency. The first pace is to become part of the SDR basket. The special drawing rights are at the same time the IMF’s currency. Its value derives from the four major currencies: Usd, Euro, Yen and Sterling. The SDR are not a real currency but only a virtual one and an account currency. The advantage to be part of the SDR basket is principally, to strengthen the demand from other countries for the domestic currency. Currently, there are around 60 national central banks that hold part of their reserves on the Chinese currency.
The last pace to do for the Chinese government to totally internationalize its currency is to permit to the RMB exchange rate to fluctuate liberally. This last step will not be so easy for China. The Foreign exchange market is very volatile and the economy could be very much impacted. Europe is a much stronger and solid economy and has suffered very much from the strong currency in the last years. For china could be the same fate once the Renminbi will fluctuate in the Forex Market.
By 31 December of this year (once every five years) the IMF will renegotiate the values of the basket. The Chinese government is pressing to reach an agreement despite the indecision and the skepticism of some countries. According to some political analysts, the last territorial disputes between China and Japan are a kind of pressure against the US, to accept the Yuan as part of the SDR’s calculations.