The inclusion of the renminbi, or as it is more commonly known the Yuan, in the International Monetary Fund's Special Drawing Rights (SDR) highlighted the growing influence of China on the global economy. 

Effective Oct. 1, 2016, China will become the first emerging market to have its currency included with more traditional, industrialized economies as part of a reserve to supplement the reserves of the IMF's member countries. SDRs are not currencies but can be exchanged with freely usable currencies.

SDRs were created to help stabilize and bolster international trade. The yuan will join the U.S. dollar, the British pound, the Japanese yen and the euro as pillars of international commerce. 

In a speech, the Managing Director of the IMF, Christine Lagarde called the inclusion "an important milestone in the integration of the Chinese economy into the global financial system."

This is no insignificant event. it reflects not only the world's acknowledgement of China's economic might but China's increasing willingness to embrace the highest, global standards for economic openness. As the country's economy has grown, China has received increasing scrutiny of its methods for collecting data and other practices. 

The inclusion follows China's agreement to abide by IMF economic data standards on Oct. 8, 2015. China now operates in accordance with the Special Data Dissemination Standard (SDDS). The country had previously been using less stringent General Data Dissemination System (GDDS).

SDDS was created to foster greater economic transparency and international best practices. According to Bloomberg, the country has lagged in its data collection. It is not providing sufficient, quality information. China sees SDDS as a way to improve its access to international capital markets.

China's recent woes have highlighted concerns about the economy. The government's efforts at triage, which included devaluation, have been suspect. 

Some observers feel that the problem can be fixed through greater transparency. If outside trade partners and investors have more confidence in how the country is handling its affairs, they will be more willing to continue dealing with China.

According to The Wall Street Journal, money managers feel that China needs to open its markets more to foreign investors. 

That would benefit everyone. The country is a crucial trading partner not only for Europe, the Pacific Rim and the U.S. but emerging markets, which rely increasingly on its metals, minerals and other commodities. The influence of China's currency was clear when the country devalued the Yuan, forcing many Asian currencies into lowering the value of their own currencies to avoid significant trade losses.

Yet clearly, the road to a true market economy is a slow one. 

On Oct. 7, 2015 in its Global Financial Stability Report, the IMF warned China that a transition to a market-driven model is a monumental task that requires "great care."

The inclusion of the Yuan and adoption of new standards are promising signs. They may be able to help China regain some of the investment community's lost faith. These events may also ultimately help prevent a return of some of the  huge volatilities of recent months. 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.