The spotlight is back on China at the annual spring meeting of the IMF and the World Bank. With the world economic outlook (WEO) projecting an absolute decline in GDP growth in Europe and a meagre 1.6% growth for advanced economies, the expected global growth of 3.5% is heavily dependent on the performance of the Chinese economy. The latter is expected to grow by 8.2%, which, though not a tall feat by Chinese standards, is nonetheless a remarkable growth, given the current situation of the world economy.

A view is also emerging that the rebalancing within the Chinese economy is happening in a manner that is beneficial for the world economy. A first step in this respect is the steady reduction in the current account surplus of the Chinese economy. From a level of 10% of GDP in 2007, the surplus has reduced to less than 3% in 2011. The entire reduction is clearly not planned and has been contributed by the weak external demand for Chinese exports in the last few years. From a global perspective, however, a reduction in China?s current account surplus underlines a correction of the imbalance in its trade with the rest of the world. Many have held the view that the build-up of global macroeconomic imbalances during the last decade has much to do with the unbalanced trade equations that China has had with the US and other major economies. The current state of affairs should provide a considerable degree of comfort to these proponents.

Apart from the lower current account surplus, the other fundamental that has been cited as a major source of global imbalance is the Chinese exchange rate. In this respect, there are two major developments. The first, of course, is the steady appreciation in the value of the renminbi (RMB) against the US dollar and other major currencies of the world. The RMB would have been released faster had the domestic stakeholders in China, particularly the manufacturer exporters and the large migrant workforce working in export firms, not been averse to the idea of sacrificing competitiveness arising from an artificially low RMB. But the steady reduction of the current account surplus and the appreciation in the RMB are processes reinforcing each other. On both counts, the Chinese economy is behaving the way the rest of the world, particularly the western economies, wanted it to behave.

While the restructuring of the Chinese economy is good news for the beleaguered European economies and the US, what is it providing to China? For China too, the on-going restructuring is not bad news. Indeed, whatever is happening is in line with the targets taken in its long-term policies, including the latest five-year plan. Bringing down the GDP growth and easing into a soft landing has been a Chinese priority. So has been a steady shift towards an economic strategy, which emphasises more on domestic consumption and greater absorption of imports. In this regard, the reduction in current account surplus too has suited Chinese interests.

China?s management of the RMB is an interesting exercise. For several years, the exchange rate has been used by China to act purely as a tool for depressing prices of ?made in China? items in global markets. China clearly would not have achieved what it has in the world of global trade and commerce had it not used the RMB the way it did. Now, however, it has shifted from using the RMB as a price tool. Its current objective is to slowly develop the currency as an international currency.

The first step towards internationalisation of a currency is increasing its use in cross-border commercial transactions. During 2011, China?s trade transactions with its partners denominated in the RMB amounted to $410 billion, which is almost a tenth of its total trade. The Bank of China has also begun entering into extensive bilateral currency swap agreements, which now amount to 1.6 trillion RMB, and are in vogue with 16 of China?s major trade partners.

Historically, major global currencies of the world are determined by the sizes of their host economies. As the world?s second largest economy, and the world?s largest exporter and second largest importer, size is a clear supporter of internationalisation of the RMB. Beyond trade transactions, China?s status as one of the biggest drawers of inward FDI and also its increasing outward investments underline large use of the RMB. China would be drawing inspiration from the fact that major economies such as the US, the UK and Germany, were all successful in internationalising their currencies despite running trade surpluses. Surpluses in the trade account can be balanced by capital outflows through greater outward FDI, which will only become more as Chinese enterprises move to more countries. Furthermore, estimates indicate that the transaction costs of settlements in the RMB are 2% less than those in the US dollar, creating favourable grounds for the RMB.

While China is yet to articulate demands for making the RMB a global reserve currency, its claims in this respect will be strengthened by the growing internationalisation of the RMB. The world will probably witness a new RMB era where the currency will again play a major role in enhancing China?s economic might.

The author is head (Partnership and Programme) and visiting senior research fellow in the Institute of South Asian Studies in the National University of Singapore. He can be reached at amitendu@gmail.com. These are his personal views