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HONG KONG. – The Chinese renminbi was anointed as one of the world’s elite currencies yesterday, a milestone decision by the International Monetary Fund that underscores the country’s rising financial and economic heft.

The move will help pave the way for broader use of the renminbi in trade and finance, securing China’s standing as a global economic power. Just four other currencies – the dollar, the euro, the pound and the yen – have the IMF designation.

But the path to the IMF decision, a bumpy process that stretches back years, also introduced new uncertainty into China’s economy and financial system.

To meet the IMF requirements, China was forced to give up some of its tight control over the currency, culminating in the abrupt devaluation of the renminbi that shook global markets in August. The changes could inject fresh volatility into the country, at a time when its economy is already slowing.

Many central banks follow this benchmark in measuring their reserves, which countries hold to help protect their economies in times of trouble. By adding the renminbi to this group, the IMF effectively says that it considers the currency to be safe, reliable and freely usable.

It is a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” Christine Lagarde, the managing director of the IMF, said in a statement in Washington.

“The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

The designation is a point of pride for Beijing, which had made it one of its highest economic policy priorities.

In the months before the fund’s decision, China moved aggressively to expand the currency’s standing on a global stage, building trading hubs in Europe and developing a raft of renminbi-denominated bonds and commodity contracts. In devaluing the currency, China changed the way it sets the value of the renminbi each morning, allowing market forces to play a bigger role.

The IMF decision also says a lot about the waning influence of Europe: The renminbi is mainly replacing part of the euro’s role in the special drawing rights. Assessing currencies for the accounting system, the fund put a greater emphasis on their different roles in international finance. The dollar still dominates in finance and trade, while the renminbi is quickly gaining ground on the euro.

The United States Treasury said it “supported” the IMF decision.

Besides its symbolic weight, the IMF label, which will take effect at the end of September next year, carries specific benefits. The renminbi will become one of the currencies used in the disbursement and repayment of international bailouts denominated in the fund’s accounting unit, like Greece’s debt deal.

The renminbi’s new status “will improve the international monetary system and safeguard global financial stability,” President Xi Jinping of China said in mid-November.

While the renminbi may gain favour internationally, the IMF designation does not mean that China’s economic overhaul is complete. China maintains heavy regulatory control over the country’s financial system. The country also falls short in legal protections, with the Communist Party continuing to play a strong role in deciding court cases.

Such issues could limit the overall appeal of the renminbi — and China’s ambitions.

“It is a historic moment in international finance for an emerging market economy, with a per-capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world’s major reserve currencies,” said Eswar Prasad, a former head of the IMF’s China division who is now the Tolani Senior Professor of Trade Policy at Cornell University. But “the most likely scenario is that the renminbi will erode but not seriously rival the dollar’s status as the dominant global reserve currency.”

The changing currency dynamics also create new geopolitical concerns.

As the renminbi becomes more deeply woven into the global economy, it undermines the ability of the West to impose financial sanctions on countries accused of human rights abuses and other violations, like Sudan and North Korea. Such countries can increasingly carry out transactions in renminbi.

China contends that it is crucial to respect nations’ sovereignty and that leaders should be allowed to set policy without fearing international criticism or intervention. China remains a close business and financial partner of Sudan and North Korea. Mr. Xi invited the president of Sudan to a recent military parade in Beijing.

“As the renminbi rises, countries will have more choices about where they do their banking — and how to potentially circumvent sanctions,” said Christopher Brummer, a Georgetown University law professor specialising in currencies. Beijing’s effort to position the renminbi as a rival to the dollar traces back to the innocuously named “Document 217.”

The Chinese central bank posted the document on its website with little fanfare in August 2010. But buried in the document’s technical jargon was an important measure with global implications.

Under a new rule, China would start allowing other countries’ central banks to begin buying its bonds in Shanghai. Officials in other countries just had to get permission first from the People’s Bank of China. – NY TIMES.