Monday, November 23, 2015

As Yuan Gets Ready to Enter the SDR Basket Some are Still Opposed

With it all but certain now that the IMF will be adding the Chinese yuan into the SDR currency basket Benjamin Cohen is still arguing that adding it is a mistake in this recent article. He says the change is all symbolic and the risks outweigh any potential benefits. Below are some quotes from his article.


"The Chinese government’s campaign to have its currency, the renminbi, included in the International Monetary Fund’s reserve asset appears to be on the brink of success. Last week, IMF staff formally recommended adding the renminbi to the basket of currencies that determines the value of its so-called Special Drawing Rights (SDRs).

The addition of the renminbi to the basket, which currently includes the US dollar, the euro, the British pound, and the Japanese yen, would provide China with a boost to its prestige. More important, it would advance the government’s efforts to internationalize the renminbi. But it would also be a mistake. The decision to recommend the renminbi’s inclusion, far from having been made on sound economic grounds, can only be understood as political. As such, the long-term consequences are likely to be regrettable."

. . . . . .

"Many would argue that this is a positive development. Certainly, it mollifies China’s leaders, offering them a stronger incentive to continue to work within the existing international monetary regime. Recent Chinese initiatives, especially the creation of the Asian Infrastructure Investment Bank, have given rise to fears that the country intends to build a new set of international institutions to compete with Western-dominated organizations like the IMF. The decision to add the renminbi to the SDR basket may have put that danger into remission."

On the other hand, the move sets a worrying precedent, injecting politics into a policy area that had been governed by objective economic considerations.           . . . . . . . 

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