On Monday, the Executive Board of the International Monetary Fund (IMF) voted to add China’s currency, the yuan or renminbi, to a very short list of elite global reserve currencies. Next fall, the yuan will officially be added to the IMF’s Special Drawing Rights (SDR) basket of currencies, which presently includes just the dollar, euro, yen and pound sterling. In part, the decision reflects the undeniable reality of China’s economic rise. However, the decision is also a pragmatic, perhaps even savvy, move by the IMF and the United States to further incorporate China into an international financial order that largely reflects Western economic ideas and interests.
The SDR is sometimes referred to as a “synthetic currency.” Its value changes daily and is based on a weighted combination of the four—soon to be five—currencies that make up the basket. From a practical standpoint, SDRs do not really matter very much. Their most prominent role is as a unit of account for the IMF. For example, the IMF officially reports its own assets and liabilities in SDR terms.
Despite that, inclusion in the SDR basket has symbolic value. It can be thought of as the IMF’s official endorsement of the yuan as a global investment and trade settlement currency. Central bankers as well as asset managers of private investment funds take the IMF’s opinion on such matters seriously. One major global bank predicts that the currency’s new status will generate $1 trillion in new investments in China over the next year. That could increase to $3 trillion over five years.