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IMF To Add China's Yuan To Its Official Basket Of World Currencies

STEVE INSKEEP, HOST:

Currency in China does not look any different today, but it means something different than in the past. That's because the International Monetary Fund accepted China's renminbi as an official currency. It's alongside the British pound, the Japanese yen, the euro and the U.S. dollar. Let's bring in David Wessel. He is director of the Hutchins Center at the Brookings Institution and a contributor to The Wall Street Journal. David, good morning.

DAVID WESSEL: Good morning, Steve.

INSKEEP: So what precisely did the IMF do?

WESSEL: Well, the IMF keeps its books in an artificial currency called special drawing rights, which, as you said, has had four currencies for the last quarter century or more. And now there's a fifth - the Chinese renminbi. It doesn't have a lot of practical significance, but it has huge symbolic importance, a sign that China is really joining the big powers of the world economy. Let's listen to how Christine Lagarde, the Managing Director of the IMF, described the decision yesterday.

(SOUNDBITE OF ARCHIVED RECORDING)

CHRISTINE LAGARDE: The addition is a recognition of the significant reforms which have been conducted, of the significant opening up of the Chinese economy, of the financial, more market-driven principles that are being used by the Chinese authorities going forward.

INSKEEP: Wow, that sounds impressive, but I can imagine someone arguing with every single point that Lagarde makes there, David Wessel, saying that China's economy is more open, more transparent, that we know what China's doing with its currency. Is all of that true?

WESSEL: Well, I'm sure it was controversial. The rules say that a currency has to be issued by a country that plays a big role in world trade. There's no question China qualifies on that count. But the rules also say that the currency has to be freely usable. And, as my Brookings colleague Eswar Prasad put it, the IMF didn't break the rules, but it certainly bent them. And - but, you know, China's so important now that they got the approval of at least the required 70 percent of the IMF voting shares for this change and had the blessing of the U.S. government, which is the IMF's largest shareholder, even though China's critics in Congress called on the IMF not to do this.

INSKEEP: David, you mentioned that this change is symbolic, that the IMF gave its stamp of approval to this currency. But there's something that's a lot more practical that I want to ask about here, and that's currency that's actually used for global transactions. Right now it's most commonly the dollar. If you're buying and selling oil, for example, you're going to do it in dollars no matter what country you're in. Is there a possibility that China's currency could gradually replace the dollar in many transactions around the world?

WESSEL: Well, there's a possibility, a slim one I think. So as you know, once upon a time, the British pound was dominant. And then the U.S. dollar replaced it. And for the longer run, we may look back on this step - this symbolic step - as a big one towards elevating the Chinese renminbi. I think it's more likely it'll supplant the pound or the yen or the euro as the primary alternative to the U.S. dollar rather than replace the U.S. dollar. But that really depends on two things - one, whether China wants that and two, whether it's willing to take the steps necessary to accomplish that goal. Being a reserve currency is a mixed blessing. Your currency is a little stronger on the exchange markets, and - but your interest rates are a little lower. And that - some - not all countries want that. And you also have to be willing to have a much more open - China would have to continue to have a lot more financial liberalization, a lot more market forces in its economy if people were really going to feel confident to put lots of their money into the Chinese currency.

INSKEEP: OK, David, thanks very much, as always.

WESSEL: You're welcome.

INSKEEP: Always a pleasure talking with you. David Wessel is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution and is also a contributing correspondent to The Wall Street Journal and a regular guest right here on MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.