The International Monetary Fund welcomed China’s yuan into its elite reserve currency basket today, recognizing the ascendance of the Asian power in the global economy.
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Effective from October 1, 2016, the yuan will be included in the SDR basket.
“The Executive Board’s decision to include the RMB in the SDR [special drawing rights] basket is an important milestone in the integration of the Chinese economy into the global financial system”, Lagarde said.
The British bank said that China is also expected to speed up its pace in developing free trade zone investments in a bid to further boost flows of the yuan, adding that the inclusion of the yuan into the SDRs could reinforce the Chinese yuan’s globalization in the world market.
Fund officials said currency met their criteria based on the country’s export volume and the fact that it is “freely usable”, meaning widely used for global transactions and widely traded in major foreign-exchange markets. The currency will now be included in a basket of worldwide reserve units, an exclusive club hitherto confined to the dollar, euro, sterling, swiss franc and the yen.
New economic realityThis move is seen as a powerful symbol of China’s meteoric rise, from poverty to a pillar of the global economy.
The ChiNext Index, which tracks China’s NASDAQ-style board of growth enterprises, dipped 0.64 percent to close at 2,655.35 points.
While the immediate benefits of the yuan’s SDR entry may be limited, economists have looked beyond the symbolic significance of the label to far-reaching implications for China’s economic and financial reforms.
They’ve also said the continuing inclusion in the basket of the yuan would rely on whether China advances using its fiscal reforms. The U.S. dollar will account for the biggest share, at 41.73 percent, and the euro will be second at 30.93 percent.
Christine Lagarde, the IMF’s managing director, said in March that yuan inclusion in the SDR was “not a question of if, it’s a question of when”.
The long-awaited outcome came as China has been pushing its currency to wider use on the global stage.
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Many central banks follow this benchmark in measuring their reserves, which countries hold to help protect their economies in times of trouble. Pursuit of SDR status is thought to have driven China’s decision to revalue the yuan in August. “Inflows can also create currency mismatches with firms and banks borrowing in foreign currency”, the report said, adding that this “can increase financial fragility as a sudden reversal of inflows can lead to a large and disorderly depreciation of the local currency”.
