The Chinese Yuan was declared an elite currency yesterday when The International Monetary Fund approved it as one of the world’s main central bank reserve currencies. As early as March 2015, Christine Lagarde, IMF Managing Director, commented: “It’s not a question of if, it’s a question of when”. In reference to the possibility of a surge in the yuan globally, many expect the yuan to continue drifting lower in the immediate term with the China economy slowing.
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On top of that the yuan’s worldwide status will be determined by how much China is willing to reform its exchange and interest rate regimes, as well as the opening up and reforming of its financial markets to make them more aligned with the worldwide standards of other global markets.
China is known to exercise secrecy in many of its financial dealings, and with the new developments, everything will depend on how transparent the country wants to be, if it wants the yuan to move to the next step of the process, which had been Beijing’s ambition for a long time.
The US Treasury Department said it supported the IMF’s inclusion of the yuan in the Special Drawing Rights basket.
Nikko Asset Management chief global strategist, interest rates and currencies Roger Bridges said the inclusion reinforces the importance of China’s ongoing reform agenda.
On Monday the IMF Executive Board made a decision from 1 October 2016 to include the yuan in the SDR basket, including dollar, euro, pound sterling and yen.
“For the renminbi to become a funding currency and an investment currency, we shall see more deals coming out from the global market to borrow renminbi or to invest in the renminbi-denominated assets”.
Through its own efforts, China has effectively made the Yuan a freely used currency for trade and foreign exchange transactions with agreements with central banks of Britain, Canada and other countries.
Offshore yuan strengthened sharply on Monday ahead of the decision, with the currency rising 0.4 percent against the U.S. dollar during the trading, marking the biggest gain in a month.
“The inclusion of the RMB in the SDR basket will increase the representativeness and attractiveness of the SDR, and help improve the current global monetary system, which will benefit both China and the rest of the world”, the PBOC said in a statement after the IMF announcement.
The International Monetary Fund (IMF) has announced that reserve currency status has been granted to the Chinese yuan.
China is the world’s second largest economy behind the USA and had asked for the yuan to become a reserve currency previous year.
The launch date for the new SDR basket was set for late next year in order to give time for SDR users to adjust to the RMB inclusion.
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“‘Freely usable’ meant freely usable to reserve managers and available to official institutions”, said Steven Englander, head of G10 foreign exchange strategy at Citi in NY.
