Yuan's baby step to global acceptance

On the surface, the induction of the Chinese yuan in the elite club of reserve currencies is a symbolic victory for Beijing, or so most financial analysts say. But there’s always a catch for everything, and, in this case, what is it? 

The club has been dominated by the United States, the European Union and Japan, and none of them can be described as China’s best and most trustworthy friend. Beijing has crashed the party, so to speak, but the easy part is over.

By “recognising” the yuan, the International Monetary Fund (IMF) has committed what was a foregone conclusion. China, on the other hand, faces plenty of tough expectations now. To cut a long, technical story short, China has been allowed into the club but needs to open wide its financial door in the process.

A lot of “reforms” are now needed in China, whose growing economic influence left the IMF with no choice but to give the yuan the top credit it deserves. 

Some of the reforms will run counter to the factors that made China an economic powerhouse today. The country’s dual-track economic model has worked wonders. It opened the economy just enough to make it bloom, but imposed just enough restrictions to keep the best fruit within its borders. Will the reforms significantly change the status quo?

Some observers have pointed out that the inclusion of the yuan in the IMF currency basket that makes up the special drawing rights (SDR) will put China under more pressure to make the yuan a freely convertible currency. Currently, yuan holders face considerable restrictions when, for example, converting the currency into US dollars and moving the money out of China. 

In other words, the yuan’s usability remains limited. 

Another key issue involving the yuan’s limitations concerns foreign holders of the yuan and the ability to purchase Chinese assets.

The other SDR components – the US dollar, pound sterling, euro and yen – seem preferable given the aforementioned problems. To make the yuan a currency in demand, China will need to address the key issues. Being a part of the SDR (the IMF’s own currency) has raised the yuan’s already hot profile, but the unit remains a far cry from being dressed up.

There are the psychological and political impacts of the IMF’s recognition, of course. Many people may be turning to the yuan on the basis of its membership in the premier league alone. That the IMF made the move after speculation mounted over the past two years on when China would overtake the United States as the world’s economic superpower is also not lost on global markets.

In the end, it’s a money game being played out at the highest level. The yuan has gained big respect, but after a while, the IMF’s blessing will look like a baby step. A lot of factors constitute a currency’s “real” value. The US dollar is not flawless itself, and claims that some greenbacks were printed out of thin air could have helped raise the Chinese currency’s standing. The “trust” issue is important, but even trust is not immune to manipulation or downright deception.

The yuan still has a long way to go. Beijing, lauded for launching a blossoming economy, will need to pull off another miracle. Interestingly, it has to alight from the tightrope that brought about all the success and tread on what much of the world considers the normal financial path.