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Bernanke: IMF Move to Include China’s Currency Shouldn’t Worry U.S.

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On Tuesday, the International Monetary Fund announced that the Chinese currency, the renminbi (RMB) or yuan, will be included in the IMF’s Special Drawing Right (SDR) basket of currencies, joining the dollar, the euro, the pound and the yen, effective Oct. 1, 2016. The SDR, created in 1969, is defined by the IMF as an international reserve asset designed to supplement its member countries’ official reserves.

IMF Managing Director Christine Lagarde said in a statement that the decision marked “an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.” The euro was the last currency to join the basket, replacing the Deutsche mark and the French franc in 1999. Lagarde went on to say that further such reforms in China will yield “a more robust international monetary and financial system, which, in turn will support the growth and stability of China and the global economy.”

But what does this move mean for the United States? According to fromer Federal Reserve Board Chairman Ben Bernanke in his latest blog for the Brookings Institution, “China received the equivalent of a gold star” by the IMF, like Bernanke received in elementary schools for doing “a good job” on his homework. “The gold star was not valuable itself — you couldn’t deposit it in the bank — but it recognized your good efforts and, maybe, motivated you to work hard on the next assignment.”

Bernanke called the inclusion of the RMB “almost entirely symbolic,” saying that despite while the SDR is designed to hold nations’ international reserves, “in practice they are not much used, except for internal accounting within the IMF, and the renminbi’s inclusion in the SDR confers no meaningful additional powers or privileges on China.”

The move makes sense for the IMF since it recognizes China’s increasing economic power and the steps the government has taken to “open up their capital markets, to meet international norms in financial regulation, and to increase the extent to which market forces help determine the renminbi’s value, Bernanke admits, but argues that  it doesn’t suggest that the renminbi “will rival the dollar as an international currency, at least not any time soon.” That’s because the global status of the dollar “is a market outcome,” Bernanke writes, “not the result of a decision by any international body or of an international agreement. Governments and private investors continue to hold dollars because they are “the deepest and most liquid of any currency; because the United States imposes no restrictions on capital flows in or out of the country; because of the quality of U.S. financial regulation; because the Federal Reserve has kept inflation low and stable for the past 30 years; and because the United States is large, prosperous and politically stable.”

Even if China’s economy grows and its reforms continue, Bernanke thinks we shouldn’t worry, since “the direct benefits to the United States of issuing the dominant international currency are probably quite modest.”

He concludes by arguing that “if in coming decades the renminbi’s global role grows for “good” reasons, like continuing liberalization and deepening of Chinese capital markets — as opposed to “bad” reasons, like a deterioration of liquidity in U.S. markets — then that growth will be positive for the U.S. and the global economy, as well as for China.”

According to the IMF, after the renminbi is included in the IMF’s Special Drawing Right basket next year, using a new formula (the formula was last revised in 1978), the basket’s weights will be 41.73% for the U.S. dollar; 30.93% for the euro; 10.92% for the Chinese renminbi; 8.33% for the Japanese yen, and 8.09% for the British pound.

— Check out A Few Surprising Things About Bernanke You Don’t Know on ThinkAdvisor.

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