US v China @ IMF, RMB in SDR Edition

Dollars, pounds, euros and yen--guess Hu's missing in the IMF's SDR.

Apparently not learning its lessons in opposing China over the creation of an Asian Infrastructure Investment Bank--so many US "allies" disregarded America's plea not for them to join over alleged governance concerns--the battle has shifted back to the IMF. The essential trouble with the US attitude towards China's inclusion in international financial institutions is that it says it wants China to take up a greater role in global governance. Fine--how about increasing China's participation in the IMF and World Bank, then? American lawmakers have continuously dodged this question. 

Now we have another example that directly goes against the idea of giving China a greater role in global economic governance. A few days ago, Premier Li Keqiang strongly suggested that the IMF consider incorporating the Chinese renminbi in the basket of currencies that makes up the IMF's Special Drawing Rights (SDR):

Chinese Premier Li Keqiang has asked the head of the International Monetary Fund to include China's yuan currency in its special drawing rights (SDR) basket, state news agency Xinhua said. "China will speed up the basic convertibility of yuan on the capital account and provide more facility for domestic individual cross-border investment and foreign institutional investment in China's capital market," Xinhua paraphrased Li as telling IMF Managing Director Christine Lagarde, in a report late on Monday.

Li added that "China hoped to, through the SDR, play an active role in the international cooperation to maintain financial stability and promote the further opening of China's capital market and financial area", the report said. "China will push forward financial reform for the real economy and prevention of risk. China will develop private, small and medium banks to provide better support for small businesses," Li was cited as saying.

Whether out of envy or spite, US Treasury Secretary Jacob Lew is now saying that the Chinese renminbi does not deserve inclusion in the aforementioned basket

US Treasury Secretary Jacob J Lew said China needs to loosen its financial controls before the yuan can qualify to be included in the IMF's basket of reserve currencies. Mr Lew urged China to ease restrictions on the flow of capital and the setting of interest rates to ensure the yuan is increasingly used as an international currency. China must implement the "necessary reforms" before it will meet the International Monetary Fund's standards for inclusion in the basket of currencies that determine the fund's Special Drawing Rights, Lew said in a speech Tuesday in San Francisco.

Countries including Germany and France have supported China's bid to be included in the basket, and IMF Managing Director Christine Lagarde has said the question is when, not if, the yuan qualifies. In late 2015, the IMF will complete its next twice-a-decade review of the basket of currencies that set the value of the SDR, which its members can count toward their official reserves. 

With more and more developed countries saying China's currency should be included, the US is again isolating itself in the reflexive anti-China camp. (Those "treacherous" Australians would probably side with China, too.) I too can cite any number of reasons why the RMB should not be included: it is not freely convertible, capital account controls are still plentiful, the exchange rate is still largely determined by non-market means, and as a consequence the RMB really moves more in line with the USD, etc. instead of as a currency moving of its own accord.

Meanwhile, Lew has reverted to the old US habit of lecturing China on what it should do, Big Brother style. Is it just me or is this not conducive to China taking more of an active role in global economic governance if it is being treated as an inferior instead of an equal? That, alas, is the trouble with the US position on China with regard to this issue. See the full transcript of this speech here.

Still, the Americans did say that China should play a greater role in global economic governance sometime ago, right? Their words, not mine.