China’s Mixed Motives: Why Beijing Is Taking on the Dollar

Getting into the IMF basket of currencies is the first step onto the world stage.

The news that the International Monetary Fund (IMF) has formally decided to include the Chinese currency, the renminbi, in its Special Drawing Rights (SDR) cheered many in the Chinese capital. For at least five years, the Chinese government has waged a lobbying campaign with the IMF and taken steps to make therenminbi, which is not a hard currency, more freely usable outside China.

But for most others, this development elicited less excitement than yawns or puzzlement.

Such reaction is understandable. The SDR is not an international currency, but a basket of currencies created by the IMF as a supplementary reserve asset for national central banks. With the admission of the Chinese renminbi, an SDR is now made of bits of the U.S. dollar (41.7%), the Euro (30.9%), the Japanese yen (8.3%), the British pound (8.1%), and the renminbi(10.9%).

A total of 204.1 billion SDRs (with a value equivalent to $285 billion) have been “created” and distributed to IMF members, but they cannot be used as a form of payment in international commerce. SDRs can only be used by central banks to calculate the value of their foreign exchange reserves...