Balancing the world's money supply is achieved by using a basket of currencies as a unit of account and the International Monetary Fund ( IMF ) will from next year add the Chinese Yuan to the existing mix of dollars, Euros, Pounds and Yen. This was probably inevitable, given the rise of Chinese commerce on the world stage.
What it means is that the Yuan has now become a reserve currency - a safe asset in which foreign governments can park their wealth. It is a form of symbolism and status and the Yuan will become part of the mechanism for valuing "Special Drawing Rights " which is a growing method of settling international accounts. Ships that pass through the Suez canal pay their dues by way of SDR's and they are finding favour in other areas of commerce.
Gaining access as a world currency unit brings with it new responsibilities. When the trading bell rings each day on world stock exchanges the value of the various currencies commences trading at precisely the level at which it ended the previous days trading. In the past, the value of rhe Yuan was entirely at the whim of the People's Bank of China ( PBOC ) and it could vary widely from the day before, depending on the mood in Bejing.
China has often been accused of manipulating the price of the Yuan to it's advantage to maintain the outflow of exports and there have been complaints that it is kept artificially low. That may explain why the PBOC last August sent money markets into a spin when it suddenly announced a two percent devaluation. The PBOC reasoned that as it was about to lose the ability to manipulate the Yuan rate it needed to bring it into line with other currencies. Becoming a reserve currency ring fences the Yuan from PBOC control.
There are signs that events may see the Yuan strengthen sharply because of a surging American dollar. The United States economy is showing signs of shedding the world slow down in trade and unemployment rates are improving, along with hints from the Fed that interest rates are about to start a climb back to normalcy. That could introduce a new stress on the Mandarins of the Chinese Communist party because a form of control, is passing out of their hands with the Yuan's elevation as a reserve currency.
The Chinese economy has long been at crossroads. Communist dogma of state ownership has given way to a degree of private enterprise and yet a huge array of state owned enterprises are suspected of being deeply in debt and receiving patronage to keep their doors open. Chinese banks have a heavy load of non performing loans being constantly renewed because to close them down would significantly increase unemployment. Losing control of the Yuan may be the imperative needed for China's government to bite the bullet and reform it's publicly owned sector.
China has taken a huge gamble. It maintained a de facto peg to the American dollar which can no longer be sustained and it is likely that we will see the SDR mechanism extend further into the commodities field, hence an ever increasing influence on the Chinese economy will be the value set by that basket of currencies. The Chinese Communist party will no longer have their hands on the control mechanism.
China is now forced to play by the rules that govern the rest of the world. Xi Jinping has emerged as a pragmatic leader who has gathered power in his own hands from a former collective leadership. He is sending mixed messages - purging the rampant corruption by those in power and at the same time cracking down on all forms of dissent. Hopefully, he will have the strength to make the hard decisions to reform the state ownership question and allow China to establish a market economy !
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