In all likelihood, the IMF will announce next month that the renminbi is set to become one of the currencies – along with the dollar, euro, yen and sterling – used by the Fund to underpin the Special Drawing Right, or SDR, its own reserve asset. As a result, the RMB will be informally crowned with the status of a ‘reserve currency’. But what exactly is in it for China?
In the near term, the biggest pay-off for China is that reserve status for the RMB could act as a catalyst for capital inflows from the world’s central banks, who might be tempted to increase the share of their reserves that are invested in China.
That will suit China nicely, since it faces the prospect of large capital outflows in the foreseeable future, as its residents move to diversify the currency composition of their wealth. The problem with these outflows is that they lead to a loss of Chinese foreign exchange reserves, and/or a weaker currency. An uncontrolled fall in China’s reserves or in the value of its currency would really limit China’s freedom of manoeuvre in conducting economic policy. So, attracting some capital inflows would help Beijing maintain some policy autonomy.