Is the ascension of the RMB to the SDR basket more than merely symbolic?
- Chinese rebalancing towards domestic consumption changes the balance of trade
- China’s largest trading partner remains the EU, making a US$ peg sub-optimal
- SDR currencies offer the best liquidity for intervention or speculation
- International investment will be dramatically enhanced by full convertibility
I've changed my view of the importance of the RMBs inclusion in the SDR. Initially I thought this a purely symbolic action but, having discussed the issue with several economists and ex-Central Bankers (including one from the PBoC) I believe this a logical move towards free convertibility of the RMB.
For many years the RMB has been pegged to the US$. During the early part of this century it rose relative to its neighbours. This was not such a great imposition on the economy since annual GDP growth was still in double figures.
After the great financial recession of 2008 things changed. New economic policies focused on increasing domestic consumption. At the same time the Chinese economy began to slow dramatically as a result of over-investment, especially in primary industries, meanwhile, the benefits of cheap labour, which had driven China’s mercantilist expansion during the past 25 years, showed signs of fatigue.
After 2008, the US embarked on aggressive quantitative easing which eventually began to foster new domestic employment opportunities – in turn leading to a recovery of the fortunes of the US$. Earlier this year the PBoC devalued the RMB albeit to a small degree.