Milestone inclusion as IMF reserve currency only one step to Chinese yuan becoming truly international

When Mao Zedong was running the Chinese Soviet Republic in rural Jiangxi province as a rebel regime, he appointed his younger brother, Mao Zemin, in 1931 to head the regime’s “central bank”, hiding gold and silver in caves as reserves for China’s revolutionary course.

Eighty-five years later, the Chinese currency with Mao’s portrait on every note has become a component currency in an International Monetary Fund accounting unit, giving the yuan, also known as the renminbi, a nominal international reserve currency status alongside the US dollar, the euro, the British pound and the Japanese yen.

It is in this historical context that Zhou Xiaochuan, China’s central bank governor for the past 14 years, has secured a sign of national pride and another legacy that could have long-lasting implications for the country and the world, on top of his achievement of retooling China’s central banking architecture from a system tailored for a command economy into an apparatus suited for an open market economy.

When Zhou published an essay on the website of the People’s Bank of China in 2009 arguing that the Special Drawing Rights, a concept more familiar for academics than traders, could potentially serve as a basis to develop a super-sovereign currency, he had few avid supporters at home or abroad. Even when the IMF officially announced it would add the yuan to the SDR last year, Ben Bernanke, the former chairman of the Federal Reserve, called the inclusion a symbolic recognition of China’s economic heft and said the yuan had a long way to go to challenge the dollar.