Earlier in November, the International Monetary Fund Managing Director, Christine Lagarde announced her backing for the inclusion of the Chinese yuan into a select basket of international reserve currencies.
It is now expected that later today, the Chinese yuan will be given official IMF approval that sees this currency obtain Special Drawing Rights status.
Gaining SDR status has been a long term goal for both the Chinese political leadership and the Peoples Bank of China.
If, as it is assumed, the yuan is included as an IMF reserve currency, then it will join other global currency heavyweights in an exclusive club that includes, the US dollar, the euro, British pound and Japanese yen.
The acceptance into this prestigious club would indicate that the IMF has looked past the problems that China has faced over the summer.
Furthermore, it would appear that the currency devaluation that the PBOC initiated is not seen as an impediment for inclusion in the SDR basket.
Although it is not thought that China will make any implicit commitments not to embark on further competitive devaluations, it does appear that the Chinese leadership will stick to a path that is more focused on consumption and that is less export driven.
The inclusion of the yuan into the IMF SDR basket is a symbolic win for the Chinese Government. However, this move by the IMF says a lot about the stance of the United States with respect to China.
With the Chinese economy continuing to grow, albeit, at a reduced rate, the United States has shown its preference to accept a country that now boasts the second largest economy within a club that was up till now controlled from Washington.
Any move by the United States to block the yuan membership into the SDR basket would have meant China taking direction away from the influence of Western nations.
The Chinese yuan membership into the SDR basket could be seen as the beginning of the end of US dollar dominance and the only global reserve currency. For sure, the US will have to loosen its grip on the IMF if it is going to accept the inclusion of the yuan into the SDR basket.
However, this is not a simple changing of the guard that sees China replacing the United States as the all-powerful economic superpower. The effects of the inclusion of the yuan will be evolutionary rather than revolutionary as the Chinese Government moves further to transforming the country’s economy.
In the long term, if the Chinese economy does continue to grow and if regulations are improved and brought in line with acceptable international standards, then we may find the world in a few decades from now that sees the United States become one two or three (if we include the euro) global reserve currencies.
In the short term, however, with both the European Central Bank and the Peoples Bank of China staying on a path of monetary easing and with the United States Federal Reserve about to begin a policy of tightening, the divergence of monetary policies should see the US dollar maintain its global dominance.