The Yuan Grows Up

Ready for the global currency basket.

Photographer: Xaume Olleros/Bloomberg

At a board meeting on Monday, the International Monetary Fund is likely to announce that China's currency, the yuan, will join the dollar, yen, euro and pound as part of the global currency basket known as the Special Drawing Right. Don't dismiss this as an inconsequential technical adjustment. It's a milestone for the world economy.

Beijing has been seeking the decision for a while, arguing that the yuan's importance in world trade warrants this new status as a global reserve currency. Earlier this month the IMF staff reported that the yuan now met the criteria for inclusion in the SDR. It remains only for the board, representing the views of the U.S. and the IMF's leading members, to sign off. They should do so.

The point of the SDR is to assure IMF members that, if necessary, they can borrow the basket's constituent currencies to meet balance-of-payment needs. Now that more trade is transacted in yuan than in yen, China's currency easily passes the first test for inclusion -- that it be "widely used." And China has made changes (such as opening up its bond market) to satisfy the other criterion, that the currency should also be "freely usable." (On Monday, it was announced that Michael R. Bloomberg, the founder and majority owner of Bloomberg LP, will lead a finance and industry working group to establish the trading and clearing of the Chinese currency in the U.S.)

Granted, deciding what's "freely usable" isn't black and white -- some discretion is involved, and China hasn't fully liberalized its capital market -- but refusing to include the yuan in the SDR would at this point look like a deliberate snub. After all, the decision is not just about the technicalities of currency baskets, it's even more about granting China standing as one of the world's leading economies. In that regard, the change is overdue.

The People's Currency

Beijing will see the move as a recognition of its efforts to reform its economy and liberalize its financial markets. The decision will likely strengthen the hand of those who want reform to go further and faster -- which would benefit China and its trading partners alike. In the short term, the direct effects on currency markets will probably be modest, but with time use of the yuan will widen further, which is all to the good.

Further changes are needed to give China and other big emerging economies a greater say in the IMF and global economic governance more broadly. Since 2010, the U.S. Congress has delayed moves to bring such nations' voting strength at the fund into better alignment with their new economic weight -- not because of deep convictions on the matter but out of lawmakers' sheer inability to get anything done.

Such neglect is unacceptable. The shape of the world economy has changed dramatically in the past few years, and there's more to come. The institutions that governments have created to manage global finance need to keep up.

(Updates third paragraph in article published Nov. 29 to reflect a new working group on the yuan.)

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.