Grand bargain shaping up between China, US and IMF

A "GRAND BARGAIN" between China, the US and the International Monetary Fund (IMF) seems to be shaping up under which Beijing may be about to enter the heart of global finance in exchange for turning the renminbi into a strong currency on world financial markets.

The People's Bank of China has been drawing on its US$3.8 trillion of currency reserves in intervention to keep the renminbi reasonably stable against the strong dollar, propelling the Chinese currency to a real (inflation-adjusted) trade-weighted appreciation of 11 per cent during the past 12 months. This exceeds the 9 per cent real appreciation of the dollar. The intervention reinforces the Chinese authorities' attempts to maintain favour with important foreign holders of renminbi, including many international central banks, even though Beijing is vulnerable to the resulting loss of export competitiveness.

The Chinese actions appear linked to an attempt to underline the currency's fitness to join the Special Drawing Right (SDR), the IMF's ubiquitous composite currency used in official financing and reserves. Although nothing has been confirmed, and final outcomes could become embroiled in international politics, China appears broadly on track to become part of the IMF's official currency unit in a review process due to be completed later this year. This would represent a landmark move for an emerging-market currency to join a monetary unit hitherto encompassing solely industrialised nations.