On the 67th anniversary of its founding in 1949, the communist People's Republic of China has been awarded inclusion of its yuan into an elite club of reserve currencies overseen by its once-hated capitalist rivals, namely the US and European-dominated IMF.
The Special Drawing Right (SDR), while largely a nominal instrument that weights the dollar, euro, pound sterling, yen, and now the yuan in a kind of composite tender for exchange-rate benchmarking and indexing purposes, still represents a key step for Beijing on its long march to parity with the developed market economies of the West, especially the US. Much like the first steps it took in the early 1980s to reintroduce market competition to the domestic socialist economy, it marks a starting point of genuine opening of the country's financial markets to international capital flows.
The mere fact that the yuan is actually being included at all - almost a year after the go-ahead was given - is a testament to the changing times. For a semi-market currency (at best) to join the ranks of mature market ones as a standard issue is an indication of how much the world at large needs China to eventually go where the SDR now says it should go, even if it's nowhere close to being there at the moment.
While Beijing now has an additional powerful impetus to push through financial reforms and liberalization, the hard realities of its present economic transition mean that the yuan is anything but ready for prime time just yet.
Significant capital outflow pressures remain, and equities in particular seem to be experiencing a lopsided imbalance with mainlanders' overseas investments absolutely swamping overseas investors' mainland investments.
On the other hand, yuan-denominated bond inflows have increased and this is an encouraging initial sign that the government and central bank's efforts to boost foreign purchases of yuan-denominated debt have borne some fruit already.
For good or ill, it seems that state policy and not private market participant demand will continue to dictate the yuan's degree of free and open international use for some time to come; even should capital controls be relaxed, this will probably only be a consequence of PBOC gaining enough confidence that its own surrogates (i.e. the large state banks) have enough "swing" clout on global RMB exchanges to sway the currency as Beijing pleases.
The increased use of RMB in global commodities trade, meanwhile, will be crucial to elevating the yuan's actual practical value as a medium of exchange in global commerce, to eventually challenge the dollar in this domain. The groundwork for such a tectonic long-term shift is being laid with the "Belt and Road" initiative, the AIIB, and other regional and global programs undertaken by Beijing to promote sustainable economic ties and links at a time when the West is confronted with the real prospect of being compelled by its own electoral politics to seal itself off and turn inward.
So the SDR inclusion isn't just a milestone for China, but potentially a truly global economic inflection point.
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