The weight of the RMB in the SDR basket is 10.92 percent; the weights of the dollar, euro, yen and pound are 41.73 percent, 30.93 percent, 08.09 percent and 8.33 percent respectively.
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Approval was expected after International Monetary Fund managing director Christine Lagarde announced last month that her staff recommended inclusion, a position she supported.
What will be scrutinised by currency traders in the immediate aftermath of the International Monetary Fund decision will be the extent to which the yuan moves in anticipation of being added to the International Monetary Fund basket of reserve currencies in 2016.
To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours.
China’s Asian International Infrastructure Bank (AIIB) initiative is widely regarded as a response to continued US-dominance of international lending institutions – the IMF and World Bank.
Inclusion is largely symbolic but it should give the yuan a boost on the world stage, and could give countries more confidence to hold the currency.
The SDR composition is reviewed every five years.
In August, trading volume grew 4 times year-on-year to an absolute maximum and amounted to 18 billion yuan (191 bln rubles – $2.8 bln).
“With this decision, the International Monetary Fund is choosing to reward China’s currency manipulation instead of combating it”, said Senator Chuck Schumer, a New York Democrat and longtime China critic.
“The IMF’s positive decision will strengthen the hands of economic reformers in China and could help sustain momentum on financial sector liberalization and reforms”. But it also introduces new uncertainty into China’s economy and financial system, as the country was forced to relax many currency controls to meet the I.M.F. requirements. It now ranks fifth as a global payments currency and seventh as a global reserve currency, according to the Society for Worldwide Interbank Financial Telecommunication.
The euro was already under pressure on expectations that the European Central Bank will unveil further easing steps at its Thursday policy meeting.
Reserve currencies are those included in loans distributed by the International Monetary Fund. Chinese officials said the move was part of an effort to make the yuan rise and fall based more on market forces.
Being one of global reserve currencies will prompt central banks to increase their holdings of yuan in the reserve currency portfolio. The IMF said the yuan “met all existing criteria” to be included as one of the currencies used for the global organisation’s SDR.
China and Britain have sold renminbi-denominated sovereign bonds for the first time in London, which has emerged as Europe’s hub for the currency.
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Currency traders and economists see the change as encouragement to Beijing to make faster progress on promises to make the yuan “freely tradable” and open its financial system.
