While the immediate effects of the yuan’s inclusion in the SDR basket will not make much difference in world currency markets – the yuan would not become a reserve currency until September 2016 – what can not be overstated is its broader significance.
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“The IMF’s recognition of RMB’s (renminbi) reserve currency status has profound long term implications for the currency’s role in the global financial system, ” Mr Wong says.
“It wants to show yuan is widely traded and freely usable by the International Monetary Fund definition”, said Lundsager, now a senior researcher with the Wilson Center, a Washington-based think tank.
“The executive board’s decision to include the renminbi in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system”, IMF Managing Director Christine Lagarde said in the statement.
The decision establishes the yuan as a fixture in the very worldwide monetary system Chinese leaders criticized following the global financial crisis.
If the yuan becomes a fixture of the global economy, then it’s likely the rest of the world will become even more exposed to what Beijing does – which will make it ever more important that China’s leaders push through meaningful financial reforms.
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. Following yesterday’s decision, the IMF will probably release a detailed staff report on the review, shedding more light on how the fund’s economists arrived at the new conclusion.
Beijing has historically kept tight control of its currency – a cheap yuan has helped boost exports and manufacturing – drawing criticism from the USA government for keeping its value artificially low. This could be benefit to a reserve currency, but in actual practice the impact is insignificant.
“As a global currency, the yuan’s depreciation against the United States dollars in November also reflected the monetary policy divergences that lifted the greenback against the other SDR currencies”.
Rather, the trend will happen gradually as central banks look to diversify away from G-10 currencies, she said, adding that she expects a 1 percent annual reallocation of global FX reserves into China on an annual basis in the coming five years. The bank said it will continue to deepen and speed up the efforts to promote financial reforms. This has led to criticism that the International Monetary Fund is “bending the rules” in favour of China. The SDR, set up in 1969 as an worldwide reserve asset, gives IMF members the ability to borrow among the basket’s currencies when necessary.
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China and Britain have sold renminbi-denominated sovereign bonds for the first time in London, which has emerged as Europe’s hub for the currency.
