Small step for money, big leap for monetary system

THE renminbi's entry into the Special Drawing Right (SDR) represents the first time that a currency of a developing country becomes a de jure reserve asset - official recognition of a momentous shift in the global power balance. The SDR is the International Monetary Fund's (IMF) artificial composite currency unit, part of the glue that binds world finance, but with no real role on international markets. This is a small step for money - but a giant leap for the monetary system.

The IMF's ruling, backed on Monday by its executive board in Washington, that the renminbi is "freely usable" and thus can be included in the SDR from next October - despite the persistence of some Chinese capital controls - has geopolitical implications. Acquiescence by the US in this landmark move is recognition that China's march to the top table of the world economy is unstoppable. Yet, confirmation of a multi-currency reserve system - under which the Chinese currency joins the dollar, euro, yen and pound sterling as a reserve asset - could herald considerable fragility as the world monetary system moves in the next few years to a new modus operandi.

The vote by the IMF board to make the renminbi the fifth currency in the SDR basket follows a relatively short, well-orchestrated campaign by the Chinese authorities to promote recognition. The renminbi will become the third biggest currency in the SDR basket from Oct 1. The inclusion of the Chinese currency marks the most significant change in the IMF's basket since the euro replaced the D-mark and the French Franc in 1999. The dollar will remain the biggest currency with a 41.7 per cent weighting followed by the euro with 30.9 per cent. With a 10.9 per cent share, the renminbi moves beyond the yen (8.3 per cent) and pound sterling (8.1 per cent).