China’s currency, the Yuan, got an upgrade by the IMF to a status of global reserve currency. Other ‘Reserve-Club’-members are the US-Dollar, Euro, Pound and Yen.
The last change was made in 2000, when the Euro replaced the German Mark and the French Franc.
One reason behind this IMF decision is obvious: China’s economic development. Today, the country accounts for 15% of the global economic output, nearly triple what it was 10 years ago.
What are the consequences?
First, it’s boosting China’s national self-esteem.
Second, the Yuan will make up about 11% of the IMF’s Special Drawing Rights – a currency-basket used for transactions when the IMF provides financial aid.
In this basket the Dollar has a weight of 42%, the Euro 31% the Pound and the Yen each have 8%.
Will the Yuan surge in value?
No, the current slowdown of the Chinese economy increases the possibility that the People’s Bank of China will depreciate the Yuan to boost exports. In plus, a more freely traded currency will most probably lead to a capital flight.
Now, after a decade-long period of astonishing growth, the year 2015 wasn’t exactly all rosy for China’s economy.
The growth fell to it’s lowest pace since 2008, the stock market crashed and China’s many political and economic challenges (especially the debt, see chapter 29) are bigger than ever.
Why would the Yuan become a global reserve currency right now?
Chinas inability so far, to really reform the economy and the monetary system is posing a global threat. If chinese policymakers can’t stop the slowdown in economic growth and fail to avert the looming banking- and credit crisis, the country could slip into a stagnation, affecting the whole world.
The IMF’s decision could motivate to really tackle deep and much needed reforms and defeat vested interests within the Communist Party. Free-market policies, as credible monetary management or independent decision making of financial regulators, would otherwise be impossible.
The open door for the Yuan to join the club of global reserve currencies is not only a recognition of achievements in the past – it’s an invitation to play by the club rules in the future.
Eurostat provides a lot of statistical information about EU countries. I just examined some data and found disturbing figures that could affect Romania’s future. More on that in the next chapter: http://www.theleader.ro/this-price-is-too-high/