The two criteria all had, to a great extent, a bearing on the failure for the inclusion of the renminbi into the SDR basket. If the renminbi could be included in the SDR basket of reserve currencies, it would mean that the IMF endorses the renminbi as an international currency, and then it would be significant changes in the two criteria for the renminbi and would be fairly easy for the renminbi to meet the IMF technical standards. In this sense, the probability for the renminbi to pass the technical reviews for its inclusion in the SDR basket would be very high.

Even if the renminbi passes the IMF technical reviews for its SDR inclusion, the stance of the US government and attitude of the US Congress on renminbi’s inclusion in the SDR basket will directly affect the final decision on its inclusion. The US government has recently stated that it would agree to include the renminbi in the SDR basket if it would pass the IMF technical reviews. The attitude of the US Congress, however, is still unknown. If the US Congress unilaterally opposes its inclusion, it would be up to the game outcome between the Chinese government and the US Congress to solve the technical hurdle for renminbi inclusion in the SDR basket.

If the renminbi could be included in the SDR basket of currencies, it will not only be a recognition of China’s ever-rising status in the global economy and financial market, but will also mean that more countries will use the renminbi as one of their reserve currencies, thus further speeding up the renminbi international process. The inclusion will be of both symbolic and substantive significance. This is what the Chinese government wants to achieve.

More importantly, if the renminbi is accepted as a currency in the SDR basket under the current circumstances, it will mean an official IMF endorsement of the renminbi as an international currency, even if the renminbi has yet to achieve the goal of free convertibility and the capital account is yet to open completely. This will, on the one hand, clear the technical hurdles for central banks across the world to hold the renminbi as an international reserve currency, and help elevate the status of the renminbi on the international markets in terms of cross-border transactions and investment settlements, and on the other hand, it will help lower the financing costs for Chinese enterprises on the international markets and promote reforms of China’s financial market. Furthermore, it will also help mitigate potentially huge risks deriving from the call for inclusion of the renminbi into the SDR currency basket only after completely free convertibility.

According to the 1994 plan, the goals of opening the capital account and achieving the renminbi free convertibility should have been completed in 1997, but due to the Asian financial crisis in 1997, the Chinese government changed and deferred the plan. Today, even 18 years after the financial crisis, the two tasks are still progressing very slowly. The fundamental reason for the slow progress is: the government finds it unpredictable about the degree of external impacts and the consequences from the opening of the capital account and the renminbi free convertibility. Under the current situation, if the renminbi is included in the SDR basket of currencies, it will mean an endorsement of the renminbi as an international reserve currency, and at the same time, the Chinese government will have the power and capacity to steer and manage the renminbi exchange rate. This is really what the Chinese government has been hoping for.

The author is a columnist with China.org.cn. For more information please visit: http://china.org.cn/opinion/yixianrong.htm

This article was first published at chinausfocus.com To see the original version please visit http://www.chinausfocus.com/finance-economy/why-should-the-renminbi-be-included-in-the-sdr-basket/