Is China getting a gold star?
When I was a little boy, my teachers would sometimes put a gold star on top of my homework. It wasn’t’ a grade, but it meant that I had done a good job.
That’s sort of what happened with China and the International Monetary Fund. The IMF decided to include China’s currency in its basket currencies, the SDR. SDRs aren’t a currency, they’re a claim on reserves held by the IMF. Member countries have to deposit some of their own currency at the IMF. In exchange, they’re granted a certain number of SDRs. They can exchange these for the basket currencies, if they want to.
As such, they’re a form of credit for small countries that may want access to hard currency reserves. They were created in 1969 as an alternative to gold in the Bretton Woods monetary system. So for the IMF to change its SDR basket to include China in its SDR basket is a form of recognition that China’s currency is now considered a major medium of exchange.
SDR weights before and after inclusion of the RMB. Source: IMF
On the one hand, the IMF’s decision is a vote of confidence for China. They’ve been liberalizing their capital markets, reforming their banking system, and expanding their role in global trade. China has a $10 trillion economy—13% of the world. Inclusion in the SDR is largely symbolic, but China’s leaders care a lot about symbolism.
But on the other hand, it’s patronizing. China shouldn’t have to ask politely to move up from the kiddie table at the Thanksgiving meal. They’ve earned the right to be treated as a major economic power. It’s impossible to ignore them when considering global economic issues. Last year China’s economy grew by over $700 billion. That’s more than Switzerland’s entire GDP.
Source: World Bank
So if there’s a report card on how countries are doing, it’s written by the marketplace, not some arbitrary, unaccountable board of dignitaries. The US Dollar accounts for 60% of official global currency reserves. Investors hold dollars because their markets are deep and liquid. Symbols are important—but only if the symbol represents something real.
Douglas Tengdin, CFA
Charter Trust Company