RMB SDR inclusion now likely

In what would be a breathtaking coup for Beijing after a tumultuous year which has all but sealed China's centrality to the global economy in often not-so-encouraging ways, the IMF now appears set to recommend the RMB to be included in the Special Drawing Rights (SDR) reserve currency basket in late November.

China's weekend decision to scrap deposit rate ceilings, though it is unlikely to have much impact on the real economy, was nonetheless one of the key remaining technical hurdles to clear for the yuan's reserve currency status.

Still, this change of fortune is rather surprising in light of no indications of significant progress in the overall liberalization of China's capital account; Chinese equity and debt markets haven't lately become more open to foreigners, nor have foreign equity and debt markets become more open to Chinese. Perhaps there's more going on behind the scenes than made public, but if that were so, even the most optimistic assessments of China's financial liberalization don't expect a full capital account opening anytime soon; the IMF could well be following the UK's lead in buckling to intensive Chinese lobbying that's hard to resist given how much the global recovery's continuation depends on Beijing.

There's no question that the 800-lb. gorilla among uncertainties in global finance is the valuation of the RMB: I have noted earlier that developed economies' dread of deflation gives Beijing tremendous leverage through their ultimate control of the yuan's exchange rate. It would now appear that the G-7 is completely sold on Beijing's insistence that, for their own wealthy societies' sake, they must concede initiative to China on the pace and nature of the yuan's increased role in global trade and finance.

Some Western analysis, like this recent MarketWatch article, are bullish on PBOC's ability to maintain the strong exchange rate without rapidly burning through its remaining $3.51 trillion in forex reserves, a prospect that seemed very plausible in the wake of August's $93.9 billion drop in the reserves.

Others have begun to look at the problem more holistically, suggesting that the RMB is actually already reacting in lockstep with smaller regional Asian currencies as opposed to merely obeying PBOC diktats.

Whatever the truth of the present situation - and again, it's most likely there's a degree of truth to each contradictory viewpoint - RMB inclusion in the SDR will send a powerful signal: China largely controls its own destiny, and just like its WTO obligations, it won't have to satisfy every Western requirement, or even a compelling majority of them, to get most of the benefits of the existing framework. Such is the power of the resurgent Middle Kingdom...