China Gets a Seat in the World’s Currency Country Club

China’s economy has been stung by a slew of bad economic news this year, with slowing growth, declining exports, and a stock market crash over the summer that saw China’s benchmark Shanghai Composite Index lose 40 percent of its value. On Monday, the International Monetary Fund gave Beijing some much-needed good news.

In a written announcement, the International Monetary Fund said the Chinese currency, the renminbi, will join the U.S. dollar, the euro, the British pound, and the Japanese yen as one of the world’s reserve currencies. That opens the door to the renminbi next year becoming part of the IMF’s Special Drawing Rights (SDR), an international reserve fund made up of virtual currency meant to back up national accounts.

Practically, the IMF’s decision is unlikely to have an immediate impact on China’s economy. Whether Beijing can meet its seven percent growth target for 2015 remains to be seen. And it will do little to bolster Chinese exports, which have been down for the last four months.  

Still, it could have an impact down the line. The renminbi will officially become part of the SDR, which countries like Greece and Ukraine borrow from when they take IMF funds, next October. Nicholas Lardy, a China expert at the Peterson Institute for International Economics, said that could hike demand for the currency, increasing its value. This would make Chinese goods more expensive to foreign buyers, something that would hurt importers of Chinese products.

Indeed, Monday’s step is largely a symbolic step by the IMF. Alan Blinder, a former U.S. Federal Reserve vice chairman, recently called the move a “merit badge” that shows the renminbi has the IMF’s seal of approval. But it’s also an acknowledgment of China’s efforts to make its currency freely usable around the world, something both the IMF and the White House want. In a statement Monday, IMF chief Christine Lagarde called it a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”

“I’m not surprised,” Scott Kennedy, a China expert at the Center for Strategic and International Studies, told Foreign Policy prior to Monday’s announcement. “The United States was sending strong signals to China beginning in March that if China did several things” it would be included in the SDR, he said.

This includes Beijing’s decision to allow the renminbi to “float” for three days in August, letting supply and demand determine its value, just like the euro, pound, and dollar do each day. Then, on Sept. 10, China announced it would open its domestic foreign exchange market to foreign central banks, allowing the likes of the European Central Bank and the U.S. Federal Reserve to place bets on the renminbi’s value. In October, the People’s Bank of China said it would remove caps on deposit rates, meaning Chinese savers can get a market-based rate of return on their savings, as opposed to one set by the Chinese central bank.

The IMF decision is an acknowledgement of these efforts. But they have a downside. During the global economic downturn that began in 2008, Chinese officials intervened with stock and real estate purchases to make China a beacon of growth as the rest of the world suffered. Relinquishing strict controls of their economy makes it more difficult to do the same in the future.

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