Get ready for a big change in the global economy. The staff of the International Monetary Fund is now recommending that China's currency be included in the fund's basket of special reserve currencies.
The IMF"s executive board plans to decide on Nov. 30 whether to use the renminbi in calculating special drawing rights. Christine Lagarde, the managing director of the fund, said Friday that she personally supports approval. Because the most influential countries on the IMF's board, including the U.S., have indicated that they would back the initiative, it would seem as if the board's final approval is a given. At the earliest, the renminbi, or yuan, would join the special drawing rights basket next September.
This would mean that the Chinese currency would join a select group of currencies, including the dollar, the pound, the yen and the euro as a reserve currency of the world. Practically, this would allow central banks to hold more yuan in their reserves. Symbolically, it would be a global stamp of approval to China's efforts to enter the top tier of world economic powers.
The Chinese economy already is the second largest in the world, but its position within the financial community has been questioned because of the inexperience of Chinese officials and concerns about the strength and trustworthiness of Chinese institutions.
There are still plenty of observers who express concern about Chinese trustworthiness. After the devaluation of the renminbi in August and Beijing's response to the big selloff in the nation's stock market, there remain questions about how well Chinese officials understand the operations of markets and how much they intend to use future devaluations to encourage economic growth.But China doesn't want to become a major world competitor through gimmicks. It has seen what has happened to Russia and doesn't want to duplicate Russia's failures.
Chinese leaders know they must make the their economy competitive in every way, and that means making it competitive in terms of long-term productivity, innovation and trustworthiness.
As China advances, the U.S. and other nations will face a real, long-term competitor. In order to face this competition and respond in kind, they can't rely on gimmicks or short-run policies that only achieve short-run goals. In the past in the U.S., short-run policies have focused on keeping the economy growing as fast as it can have resulted in little or no growth in labor productivity, low rates of capacity utilization in manufacturing and the lowest level of labor force participation in the past 40 years.
Whether the U.S. and these other countries can take on the challenge of China remains an open question.
Looking at the other "reserve currency" nations and regions we see that Japan has just entered into another recession. The eurozone faces major economic problems with the European Central Bank on the verge of entering into further quantitative easing. The problems in the Middle East and the migration issue are causing even greater strains on a political union that is incomplete, argumentative and possesses the possibility of self-destruction. The U.K. is small and losing clout among world leaders.
The U.S. does not seem prepared to focus on the longer-term issues that arise out of the current global competition. The contenders in the 2016 presidential race appear to be oblivious to the looming shadow that faces them.
If the Chinese plan to play the game according to the rules and intend to abide by the rules going forward, then the acceptance of the renminbi as a reserve currency by the IMF will, in fact, turn out to be a game-changer. The U.S. and other major countries ignore such a development at their peril.