It is also an important milestone in Beijing’s campaign to internationalise the yuan.
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After completing its five-year review, the executive board deemed the renminbi suitable to be included in IMF’s leading reserve currencies, used for worldwide emergency lending to member countries.
Asked about the impact of the yuan’s inclusion in the IMF’s Special Drawing Rights (SDR) basket on the rupee, Rajan said there could be a further softening of the Chinese currency, but India would not shift accordingly.
The IMF’s executive board concluded that China’s currency has met the two criteria for inclusion – having achieved “gateway” status due to the issuing country’s export volume and how freely it can be traded. Chinese officials said the move was part of an effort to make the yuan rise and fall based more on market forces.
It joins an exclusive group of currencies that now make up the IMF’s reserve basket: the USA dollar, the euro, the British pound and the Japanese yen.
By agreeing to include the yuan in the its basket of reserve currencies the International Monetary Fund has calculated that China under the assertive President Xi Jin Ping would not take kindly to another rebuff.
While there’s little suspense in the main thrust of the expected approval Lagarde has already announced that fund staff had recommended the yuan be included and that she supported the finding the IMF is likely to give more details on how it arrived at the decision. Beginning in October, the dollar will account for 41.73% of the SDR basket, the euro 30.93%, the yuan 10.92%, the yen 8.33% and the pound 8.09%.
In a muted reaction to the inclusion news, the central parity rate of the yuan weakened on Tuesday by 11 basis points to 6.39 against the United States dollar, according to the China Foreign Exchange Trading System. This largely symbolic gesture is an historic one – and a sign that China is rising ever faster and further on the global financial stage. TASS news agency also said Russia’s central bank had chose to include the yuan in its foreign exchange reserves.
The IMF endorsement is a bright spot in what has been a tumultuous year for the world’s second-biggest economy, which has been buffeted by slowing growth, a tumbling stock market and a shift by authorities toward a more market-oriented exchange rate.
China’s central bank welcomed the decision. The International Monetary Fund’s recognition of China’s currency is a step towards encouraging its global use.
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During the Global Financial Crisis, China was highly critical of the worldwide financial system and called for greater use of Special Drawing Rights (SDR) as an alternative to the dollar. “The inclusion of the RMB in the SDR basket will increase the representation and attractiveness of the SDR, and help improve the current global monetary system, which will benefit both China and the rest of the world”.
