Yuan's reserve currency status marks beginning of China's economic preeminence

The International Monetary Fund (IMF) this week determined that the Chinese yuan will be added to its Special Drawing Rights (SDR) basket from October 1, 2016, five years after it had refused the currency's entry for not meeting the "freely usable" requirement.

The Washington-based international organization gave the yuan a weighting of 10.92 percent in the basket of elite global currencies, which is currently made up of the US dollar, euro, Japanese yen and British pound, less than the previous estimate of 14 percent.

People from all walks of life in China are excited about the IMF's decision, as it can not only elevate the yuan's position in global reserves, but also can help further China's financial reform.

China's state media described the yuan's SDR basket inclusion as the IMF's recognition of the progress China has made in reform and opening up over more than 30 years, during which China has become the world's second-largest economy and the world's biggest trading nation.

So far, the UK, Nigeria, Thailand, South Africa, Belarus and Indonesia have chosen the yuan as one of their foreign exchange reserve currencies. As of the end of 2014, the yuan ranked seventh among reserve currencies held by global governments. So, it is natural for the yuan to be included in the IMF's reserve currency basket.

With the rising economic clout, China views the yuan's addition to the SDR basket as a milestone in its bid to enhance its say in the global economy. At the same time, China clearly realizes that it still has a long way to go on the path to economic preeminence.

Globally speaking, a peripheral country which wants to dominate the international economic system has to go through a long, bumpy road. For example, the United States grew its economy to become the biggest in the world at the beginning of the 20th century, helped by the First World War, which devastated the economies of European countries. After the First World War, the US became the world's biggest creditor by lending a lot of money to the war-affected European countries, including the UK. At the time, the US already had the strength to replace the UK as a new leader in the financial world, but was later frustrated by the Great Depression.

In a sense, today's international economic system is based on the lessons the US learned in the years between the two world wars, during which it tried to create a machine to control Europe's economic operation by issuing loans to the countries in the region. The Great Depression stopped the machine, which in turn brought down the US in a domino effect.

After the Second World War, the US gave up the role as a major lender, and set up the IMF to provide additional reserves to global governments.

There are two reasons behind the failure of the US during the 20 lost years. Firstly, despite its strong economic power, the US lacked the ability to manage the international economic affairs and the Wall Street could not rival London as a global financial center. Secondly, the US only half-heartedly tried to have Europe under its control. The two factors are attributed to the US' collapse after the Great Depression.

As the yuan has successfully entered the SDR basket, China should learn lessons from the US experience and build capabilities to avoid financial risks to promote economic growth. In the short run, the yuan may depreciate after the SDR basket inclusion, but the People's Bank of China, the country's central bank, has sent a message that there is no basis for the currency to continue to devaluate. In addition, China should continue to push forward with the financial reform and to improve the domestic financial system in order to make the yuan freely usable in true sense. And lastly, China should cultivate its own financial talents and lift Hong Kong and Shanghai's status as the world-class financial centers.

(The article is translated by Ding Yi.)

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