Delamaide: China bullies its way to new currency status

WASHINGTON — China gained admittance Monday into the elite club of top global currencies, even though the world’s second-largest economy fails to observe many of the free-market rules governing world trade and finance.

The move by the International Monetary Fund to include the Chinese yuan, officially known as the renminbi, in the basket of currencies it uses for its own accounting of reserves is largely symbolic and will have little immediate impact on world trade or markets.

But the IMF’s willingness to stretch its own rules about what currencies make up its basket — the others are the U.S. dollar, the euro, the Japanese yen and the British pound — is an appeasement of China’s growing desire to throw around its economic weight and could have unintended consequences down the road.

After months of debate, the IMF concluded that the Chinese currency is “freely usable” even though it patently is not.

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It can't be freely traded in foreign exchange markets and Chinese securities markets are not open to foreign investors — two criteria that until now would have been considered minimal requirements for “freely usable.”

Rather, the word is that China has made progress toward making its currency more international, and this recognition by the IMF will strengthen the hand of reformers in Beijing who want to fully open the economy to international trade and investment.

Given the way China has flouted the rules of any international organization it has joined whenever it feels like it, this seems like an optimistic assumption and makes the decision look politically motivated.

And those politics are not necessarily in the interest of the United States.

The French managing director of the IMF, Christine Lagarde, who pushed through the decision on the yuan, has already demonstrated with the recent Greek bailout that she is willing to ride roughshod over the IMF’s own rules when it suits Europe’s interests.

In that case, she pushed through IMF loans to Greece far in excess of what would have been allowed under normal lending limits, and most of that money went to French and German banks so they could be repaid in full for their imprudent lending in Greece.

Now, by ignoring China's failure to meet even the most minimal tests for a freely convertible currency, she is willing to placate China’s desire to join the ranks of developed Western-style democracies even though it is, in most respects, very much an emerging market with a long history of political repression.

In doing so, Lagarde is driving another nail into the coffin of the multilateral institutions set up after World War II to help regulate and manage a global economy — the IMF, the World Bank and the World Trade Organization.

Europe has been far more eager than the U.S. to defer to China’s economic ambitions. European countries, including France, broke with the U.S. earlier this year to join the Asian Infrastructure Development Bank being set up by China as a regional counterweight to the postwar institutions.

The WTO has become almost completely useless, in no small part because China routinely disobeyed its rules after joining in 2001. The World Bank has been overtaken by events, as many development projects can now get commercial financing, and that institution has floundered over the years.

China and other emerging markets argue that it is imperative for postwar institutions to evolve and adapt to shifts in the global economy, notably the growth of the emerging economies and the decline of the U.S. and European share of world GDP.

The U.S. has resisted a reallocation of voting rights in the IMF that would reflect that shift, but it acquiesced in this week’s symbolic currency move.

There is still a good deal of political controversy in the U.S., however, regarding China’s alleged manipulation of its currency to boost its exports and to keep out imports by artificially depressing the yuan’s value.

The IMF wanted to signal that China has come closer to allowing market forces to determine the value of its currency, even though the evidence for this is mixed.

The U.S. has enjoyed a privileged place in the postwar economy because of the dollar’s role as the main reserve and trading currency. Many other countries, including developed countries, have chafed under this U.S. privilege.

But efforts to find alternatives have not been successful. The latest hope was that euro would take on a bigger role in trade and finance, but the Eurozone's joint currency has been racked in crisis for more than five years.

It is far from certain that the world financial system, and particularly the United States, will benefit from the greater role of a country that is flexing its economic muscle with the acquisition of natural resources across the globe, ignoring trade rules on subsidizing exports, still engaging in a fair amount of currency manipulation and aggressively seeking not only economic but military hegemony in its region.

Columnist Darrell Delamaide — @ddelamaide on Twitter — has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others.