China bullies its way to elevated currency status

IMF deems renminbi ‘freely usable,’ though it most certainly is not

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

The move by the International Monetary Fund to include the Chinese yuan, officially 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 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 desire to throw around its economic weight and could have unintended consequences.

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

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.

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

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

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

Now, by ignoring China’s failure to meet even the most minimal tests, she is willing to placate China’s desire to join developed Western-style democracies even though it is an emerging market with a 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.