© REUTERS/ David Gray / Files
© REUTERS/ David Gray / Files

Kristian Rouz — The Obama administration has significantly softened its stance on mainland China’s bid for the renminbi to be included in the International Monetary Fund (IMF) after the People’s Bank of China (PBOC) acknowledged the Communist nation must accelerate the liberalization of its financial system.

Meanwhile, the US-Chinese economic and financial rapprochement has gained significant momentum as China posted the record highest capital outflows in August, while the mainland’s currency reserves are also depleting amidst the ongoing financial transformation.

Beijing seems to have reached a domestic consensus that the old export-driven growth model is running dry, and thus is preparing to embrace the reforms agenda. The US, in return, signaled its readiness to soften reform requirements for mainland China, while approving Beijing’s desire to fit into the global financial architecture in accordance with the latter’s open-market practices.

The IMF said last month mainland China’s bid for the renminbi’s inclusion into the Fund’s basket of reserve currencies would be postponed to be reviewed again in September 2016. Until then, mainland China must fulfill several requirements to bolster the renminbi’s presence in international central banks’ reserves and to liberalize their domestic financial market.

US President Barack Obama and mainland China’s Premier Xi Jinping met in Washington on Friday, resulting in a joint statement saying the US supports the renminbi’s inclusion into the IMF’s pool of reserve currencies “provided the currency meets the IMF’s existing criteria in its SDR review.”

Such a move is not, however, an initiative by the US, but rather an encouraging approval of the traction the reforms agenda has recently gained in mainland China. PBOC board member Sheng Songcheng said earlier on Friday that China must accelerate its efforts to open up its financial system to the world, as the recent market meltdown has demonstrated the old model is not working anymore.

Sheng stressed that foreigners own a negligible 2.5% of Chinese stocks, and, while the nation is starving for investment capital, it is of an urgent necessity to attract foreign investment.

Sheng also outlined the corruption flourishing in the system of control over cross-border money flows, reiterating that capital controls should be lifted in order to encourage further reform, ultimately implementing market-based interest rates and FX rates in order to stave off speculators, often exploiting their connections with corrupt government officials to manipulate the market.

In June, the US stated it “supports China making the reforms that would lead to the inclusion” of the renminbi to the IMF’s pool of reserve currencies.

Now, the US said they support “China’s commitment to implement further financial and capital market reforms,” also saying that it is the IMF that will determine whether the renminbi bid should be approved or not.

In other words, the US offered mainland China to follow Sheng’s recommendations by intensifying Beijing’s efforts to liberalize its financial system, while increasing the scope of its offshore renminbi trade, both of which are also the shortest route to fulfill the IMF’s requirements.

Previously, the UK Chancellor of the Exchequer George Osborne welcomed mainland China’s decision to increase the scope of its offshore renminbi trade in London as it benefits both China and the UK – by contributing to the renminbi’s presence in international reserves and to the scope and profitability of financial operations in the City of London.

Mainland China’s reforms and a subsequent integration into the global financial system will release significant amounts of capital surplus as a result of deregulated practices of foreign investment in China. International investors will enjoy their premium from investment returns, while Beijing will extract its own benefits, restoring a faster pace of economic expansion. Friday’s joint US-Chinese statement thus outlined the shortest way to get there, and therefore might be considered a compromise deal of China’s integration into the global financial system on, albeit softened, America’s terms.