The IMF has made a decision to include the Chinese currency yuan in its Special Drawing Rights (SDR) basket that will make it the fifth reserve currency after the USA dollar, Euro, British pound sterling and Japanese yen.
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China’s renminbi has been approved by the International Monetary Fund as a world currency and will be added to the list of elite world currencies in the Special Drawing Rights basket.
According to the forex reserves movement figures on the Central Bank of Nigeria’s (CBN) website, the reserves derived mainly from the proceeds of crude oil sale, remained within the band of $30 billion throughout November.
In recent weeks other analysts, such as those at Bank of America-Merrill Lynch, have forecast the yuan will weaken in 2016 by more than financial markets were discounting, which might weigh on the commodity space, including copper and oil futures. As of now these banks hold about 780 billion yuan, or 1.1% of total foreign reserves held by central banks around the world.
Martin Wolf, the chief economic commentator for the Financial Times newspaper, said the IMF’s decision will have little impact on the use of the yuan internationally given that the SDR regime has been marginalized in the global monetary system.
The IMF said the yuan’s inclusion will make the SDR more diverse and representative of the worldwide community.
The IMF’s “currency basket” is a weighted daily average of the market exchange rates of the top currencies, which is more stable than any of the individual major currencies alone.
The yuan will be the first developing country currency to join the basket since 1981, when the International Monetary Fund whittled the basket down from its original 16 currencies in the 1970s to five. The IMF board concluded that the yuan met all existing criteria, largely those related to export and global usage.
China’s central bank, the People’s Bank of China (PBOC), announced on Tuesday that it welcomes the IMF’s decision and said that the move shows the IMF’s recognition of China’s economic development and reform achievements.
The yuan is set to officially become a reserve currency since October 2016.
The Chinese government, however, still pegs its currency to the dollar.
Economist Wang Dan with the Economist Intelligence Unit says the tangible benefits to the renminbi being added to the SDR will be limited.
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To be included in the SDR basket, the yuan had to meet the criteria to be “freely usable”, or widely used to make global payments and widely traded in foreign exchange markets – a yardstick it missed at the last review in 2010.
