Success has finally come for a China plagued by economic uncertainty.
GDP growth is falling, the stock market is a mess, and people are moving money out of the country at a record pace. Reform progress remains uncertain at best.
At these trying times, China will welcome support from the international community as it finally got what it wanted: International Monetary Fund Managing Director Christine Lagarde endorsed China’s currency to be included in the fund’s reserve basket. The executive board’s decision on Nov. 30 is a mere formality.
The inclusion in this Special Drawing Rights (SDR) basket is a big nod of approval by the international community. The only other currencies in the basket are the dollar, the euro, the yen, and the pound sterling. The cream of the crop of world paper currencies.
In doing so the IMF, an institution where the United States holds veto power, explicitly acknowledges China’s economic progress. For any country, the currency is a symbol of confidence in the economy.
If internationally recognized, so is the economy, its economic policies, and by extension, also its leadership.
A Matter of Prestige
But besides the point that the IMF is often very wrong in its predictions and assessment of financial markets and economies, prestige is the only thing China is getting out of this one.
International finance is often quite removed from reality and the SDR is as far removed from reality as it is financially possible. Most market participants don’t even understand it, as it has little practical use.
It is a basket of currencies, as advertised. But it’s not like 1 SDR (currently worth $1.38) actually represents $1.38. It doesn’t.
