Abacus | China’s real reason for getting yuan into IMF’s (otherwise pointless) currency basket

Put out the flags, sound a fanfare, and give three rousing cheers. In a move which mainland media have compared in importance to China’s 2001 accession to the World Trade Organisation, from this month the yuan is to become a component of the Special Drawing Right (SDR).

If you’d never heard of the SDR before Chinese officials started making such a big song and dance about it, it was for a good reason: the SDR is altogether irrelevant. Devised almost 50 years ago as a unit of account for the International Monetary Fund (IMF), the SDR is a notional basket of major currencies including the US dollar, the euro, the yen and the British pound. Unsurprisingly, given its inconvenience, the idea never caught on, and the SDR lapsed into well-deserved obscurity, universally ignored outside the rarefied economic atmosphere of the IMF’s offices.

Ignored, that is, until six or seven years ago when People’s Bank of China governor Zhou Xiaochuan started lobbying intensively for the inclusion of the yuan in the SDR basket. At the time, his enthusiasm for the long-forgotten unit bemused many observers, especially because Zhou is a smart chap who well understands the SDR’s unimportance. But Zhou was playing a bigger game. He was promoting the yuan’s SDR inclusion not because he believed it to be desirable in its own right, but because he saw it could be used as the means to a vital domestic policy end.

Zhou’s genius was to persuade his nationalistically-inclined but otherwise conservative compatriots in the Communist Party that membership of the SDR basket would confer enormous international prestige on China. Inclusion would endorse the yuan as a top-rank international currency on a par with the US dollar, confirming China’s status on the world stage as an economic and financial superpower.