In the first such change since 1999, the International Monetary Fund(IMF) announced that the Chinese yuan is to be recognised among the elite group of worldwide reserve currencies. China’s currency—also known as the renminbi—joins the dollar, yen, euro, and pound as “safe-haven” currencies that governments typically hold in high quantities as foreign exchange reserves. These reserves are used to manage exchange rate risk and pay off international debt obligations. Professor of Economics at Northeastern University, Kamran Dadkhah explains the rationale behind reserve currencies, the process that led to the yuan’s inclusion, and what implications the IMF decision might have on the world economy going forward.
The decision by the International Monetary Fund, which will go into effect next October, has two symbolic messages for China and the Chinese economy. First, it acknowledges China’s standing as the second-largest economy in the world with its vast international trade. Second, it urges China to continue the liberalisation of the renminbi (yuan), which has been going on for some time. For many years, China deliberately kept the value of the yuan low to encourage and help its exports. However, now it has made a commitment to keep the value of the yuan stable. Indeed, it is believed that presently the yuan is somewhat overvalued. Now China is managing the yuan’s free exchange rate; it is expected that in the near future the yuan will become “free.”
Needless to say, the source of the strength of the United States economy is the free market where entrepreneurship is valued and people can enjoy the rewards of their work and innovation. As long as the country adheres to the principles of the free market, the U.S. will remain economically strong and the dollar, the main international currency.We can imagine a world with a globalised united economy where there are only one central bank and one international currency. However, at present, such a thought is the stuff of science fiction novels.
Harminder Singh