IMF Managing Director Christine Lagarde said the decision represented “an important milestone” in China’s integration into the global financial system.
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Asian shares fell on Monday as Chinese stocks extended last week’s sharp losses, while the yuan bounced in volatile trade hours ahead of an International Monetary Fund decision on whether to promote it to a basket of global reserve currencies.
The SDR, created by the IMF in 1969, functions like an global reserve, allowing member countries to draw upon any of the reserve currencies in the basket.
The admission of the Chinese currency into the world’s foreign exchange reserve basket is hugely symbolic for the yuan, but strategists are not confident that central bank reserve managers will rush to top up their yuan holdings in response.
China is the world’s second largest economy behind the US and has been making its currency more easily convertible at yuan trading hubs in London and in Canada.
SDR inclusion of the yuan, also known as the renminbi, has always been one of Beijing’s goals. The dollar now accounts for 41.9 percent of the basket, while the euro accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent. Neither EconoTimes nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon. But it is the first time an additional currency has been added to the SDR basket and the biggest change in its composition in 35 years.
“That RMB being included in the SDR basket means that it is now one of the most important currencies globally”.
That weighting revision was based on the value of the exports of goods and services by country or currency zone, and the amount of reserves denominated in the respective currencies held by other International Monetary Fund members.
Officials altered the mechanism by which the yuan is fixed against the U.S. dollar to make its movements more responsive to market forces.
So for China to join this very small club is quite a statement of how the world economy has changed.
The Financial Times said the inclusion of the Chinese yuan may be “like many Chinese financial reforms: significant in hindsight but harder to get excited about in its early stages”. Amid concerns that Beijing could backtrack on its promised economic overhauls, Ms. Lagarde said the fund would continue to monitor the yuan to ensure it met the reserve-currency criteria.
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The addition could provide enough of a boost for China’s currency that the country should be able to limit future moves to prop up its currency – like its August devaluation that rocked global markets.
