China to take a global step forward

The decision of the Third Plenum of the Communist Party of China Central Committee in November 2013 said clearly that market forces should play a "decisive" role in the Chinese economy. If China joins the SDR and becomes a reserve currency, then the renminbi's convertibility would have to increase. This means removing the approval process that presently controls outflows of capital. Large inflows of foreign capital and a more open currency would probably reduce Chinese interest rates and reduce currency risk for Chinese investing overseas. But greater openness would also weaken the control of the Chinese central bank over the domestic economy. The Chinese central bank could use interest rate policy either to influence the level of the renminbi or to speed up or slow down Chinese economic growth. But not both. Growth in China's economy is already affected by foreign demand for Chinese exports. Reducing capital controls will increase China's economic openness. Can the government promise economic stability to its people, while giving greater power to global market forces in the Chinese economy?

Yet China is already the world's second-largest economy, and by one important measure the largest. It is also the world's largest importer and exporter, the largest user of almost every commodity, the largest oil importer and the country with the most Internet users. China's global importance and interdependence are large and growing. Since China started to push the renminbi as a global currency in 2009 (as a response to the global financial crisis in 2008), renminbi swap agreements have been signed with 30 central banks, the renminbi has become the most important Asian trading currency, and more than 20 central banks, some in Europe, have arranged to hold renminbi as part of the reserves that back their own currencies. The renminbi has already become a reserve currency in the fastest-growing part of the global economy－Asia. Doesn't this mean that the renminbi is bound to join the SDR and become a global reserve currency?

One reason why not is economic. There is a strong argument that membership of the SDR will provide a strong external force for change and reform within China, as joining the World Trade Organization did in 2001. Chinese traditions impose obligations to respect international commitments. These obligations can outweigh the reluctance felt by many in China at making internal changes. But is China really ready to open its economy up to the swings and roundabouts of the global economic system?

Another reason why not is political. In March we saw the United States try to isolate China by telling its key allies not to join the Asian Infrastructure Investment Bank. The growth of Chinese power in the Asia-Pacific region is an obvious challenge to the US, which is trying to maintain its strategic influence in a region that has become economically the most important in the world. The US may not be able to veto China's SDR membership, as a change in the IMF's constitution is not required, but it can exert strong influence against China joining the SDR.

Ultimately it is the market, not any government, that plays the key role in the rise of a currency, by choosing to use it to settle trades and to hold money deposits. The US, which often advises China to base its economy on market forces, should follow the market, take its own advice, and vote to bring the renminbi into the SDR. This would be a recognition of reality and would provide an important encouragement to the economic reform and change that China needs in order to meet the challenge of its slowing economy. Sometimes, as in 1999 when China decided to join the World Trade Organization, the correct course looks a little risky. But if China is to realize its dream, it must continue to trust itself, open up and embrace the world.

The author is a visiting professor at Guanghua School of Management, Peking University. The views do not necessarily reflect those of China Daily