The yuan, also known as the renminbi, will join the likes of the USA dollar, the British pound and the euro in the basket known as the Special Drawing Rights. The PBOC itself has said “Going forward, China will continue to deepen and accelerate economic reforms and financial opening up, and contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance”.
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“The inclusion of the yuan in the SDR basket was a tectonic change, but the big task facing the Chinese authorities is to convince the private sector to hold yuan for reasons other than trade facilitation”, said Standard & Poor’s Asia-Pacific chief economist Paul Gruenwald.
Skeptics will likely downplay the IMF’s decision, saying it is mostly symbolic for China and the country has further reforms to make before its currency becomes a force in financial markets. At the time, it was the euro which had replaced the French franc and the Deutsche mark. The euro will be 30.9 percent, the yuan 10.9 percent, the yen 8.3 percent, and the pound 8.1 percent. China did so partly to meet the IMF’s rule that a currency must be “freely usable” before it can be included in its benchmark.
“The IMF’s executive board decided that the renminbi qualified for the SDR basket and existing criteria”. In the last review by International Monetary Fund in 2010, those properties were missing in yuan, added the Sky News report. “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 key medium-term benefit is that China will be able to issue liabilities in its own currency, thereby helping to mitigate funding risks”. It is reviewed to ensure that it reflects the relative importance of currencies in the global trading and financial systems.
With the long awaiting inclusion of the RMB by the International Monetary Fund, the external world has lost a vital leverage in empowering reformers and inducing domestic reform in China.
Renminbi is the currency’s official name and means “the people’s currency” in Mandarin; yuan is the unit.
While Monday’s move is a stamp of approval, Beijing still needs to do more “to open up China’s capital accounts and convince global reserve managers to invest meaningfully in Chinese reserve-related assets”, wrote Koon How Heng, a foreign exchange analyst at Credit Suisse in a research note.
The yuan will be included into to the basket effective October 1, 2016.
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But American Enterprise Institute scholar Desmond Lachman says he doesn’t anticipate China will make a meaningful move against the dollar in the near future.
