On October 1 of this year, the IMF added the Chinese Yuan (CNY) to the Special Drawing Rights basket of currencies. Only Big Boy currencies are included, and now China is part of the club: USD, GBP, JPY, EUR and now CNY make up the basket.
The IMF could not ignore the currency of the world’s second largest economy. In order to be considered, China pledged to speed up the internationalization of the CNY. That meant gradually opening up its capital account, and gradually allowing the market to determine the value of the CNY.
China isn’t one to follow diktats of foreign countries to the letter, but Beijing recognizes that the Yuan’s addition to this symbolic basket is one step further toward legitimizing their economy and the methods by which they manage it.
But will China play ball now that it is in the club? The Yuan has depreciated over 7 percent this year. Everyone agrees that the Yuan will need to weaken. At issue is the pace and eventual magnitude of that weakening.
China is addicted to credit-fueled growth. Beijing recognizes the problem, but credit growth continues. Someone will need to bear the losses. It will either be heavy industry or the household sector.