But in the long term, its inclusion could encourage the Chinese central bank to take a more hands-off approach to the currency’s movement and stay on the financial reform track, he said, adding that the yuan would then play a greater role in global trade and financial markets.
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If the currency’s elevated status leads to more of it being held by central banks and businesses, it would be helpful for the government’s finances.
The vote of confidence in the yuan as a world reserve currency will come as welcome relief to Chinese authorities as they seek to allay investor fears about China’s economy and turmoil in its stock markets.
SDR inclusion of the yuan, also known as the renminbi, has always been one of Beijing’s goals.
The yuan will have a 10.92% weightage in the IMF SDR, higher than the Japanese yen and British pounds, but much lower than the United States dollar and euro.
IMF managing director Christine Lagarde called the decision “an important milestone” in the integration of China’s economy into the global financial system, and said it also recognizes the progress that Chinese authorities have made in recent years in reforming monetary and financial systems.
International Monetary Fund member countries can borrow money at favourable rates from the IMF’s reserves in any of the currencies listed in the SDR basket.
“Following the successful SDR inclusion, China may further loosen its grip on the CNY and allow material currency depreciation over the coming year”.
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.
The U.S. Treasury Department is in support of the IMF’s decision to include the renminbi in the SDR.
Created by the IMF in 1969, the SDR is an worldwide reserve asset to supplement its members’ official reserves. After the IMF’s approval now renminbi assets is worthy of holding in central banks’ FX reserves.
However, yuan will not be joining until October 2016 and the 11 months ahead will give the International Monetary Fund managers the required time to prepare for the new composition of currencies.
Some analysts have suggested that by 2030 the yuan will become one of the top three major global currencies, together with the dollar and the euro.
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To meet the SDR requirements, China was forced to relinquish some of its control over the renminbi – a move that ended with a sudden devaluation of the money that impacted global markets in August.
