This is Backwards

The IMF is likely to announce Monday (tomorrow as I wrote this, yesterday as you read it) that it will add the PRC’s renminbi to its basket of reserve currencies alongside the US dollar, the British pound, the Japanese yen, and the eurozone euro. As a result of this, the renminbi will be more tightly scrutinized, and the IMF’s hope expectation is that the PRC will become much more open in its handling of the renminbi. As The Wall Street Journal put it Saturday,

Inclusion would also put pressure on the central bank to offer the same degree of clarity and transparency that the US Federal Reserve, the European Central Bank, and other vital institutions strive for.

Here, too, is Sheng Songcheng, Director of the Statistics Division of the People’s Bank of China:

We will have to build up confidence in renminbi assets from investors both at home and abroad and at the same time, prevent the financial risks associated with a more global currency. That calls for carrying out various financial reforms in a coordinated way.

A couple things: Sheng is not the top official of the PRC’s central bank; he’s just the guy in charge of one of the bank’s departments.

More importantly, though, is that this order of events is backwards. The central banks of the US, Great Britain, the EU, and Japan were open, transparent, and generally free of government manipulation before they became global reserve currencies.

So should it (have been) a requirement for the PRC, the PBOC, and the renminbi. The promises and predictions of a lower level functionary of the PRC government have little value.

An aside and a short lesson, courtesy of a friend of mine: the terms “renminbi” and “yuan” very often are used interchangeably; this is incorrect. “Renminbi” refers to the national currency, just as “dollar” and “pound” (or “British pound” where the distinction matters) refer to national currencies. However, unlike in the US and Great Britain, where “dollar” and “pound” refer also to units of the national currency, the unit of the PRC’s national currency is “yuan:” that thing in the window costs five dollars, or it costs five pounds, or it costs five yuan—not five renminbi.

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  1. Pingback: “China Loses Its Grip on the Yuan” | A Plebe's Site

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