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.
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The SDR basket is typically reviewed every five years by the IMF’s executive board to ensure it “reflects the relative importance of currencies in the global trading and financial systems”.
When the supply of gold and the dollar started lagging and could not keep pace with the growth in world trade or new developments in financial markets, the International Monetary Fund created an asset that could be exchanged for freely usable currencies.
The RMB will have a weighting of 10.92 percent in the new SDR basket, while respective weightings of other currencies in the basket are 41.73 percent for the USA dollar, 30.93 percent for the euro, 8.33 percent for the Japanese yen and 8.09 percent for the British pound.
Last week it was reported that the Russian Central Bank has already included the yuan to the list of currencies it uses to hold reserves, in addition to the U.S. dollar, euro, and pound sterling.
The SDR is an asset that functions nearly like a currency.
With its inclusion of the RMB in the SDR basket, the International Monetary Fund is effectively declaring the Chinese currency as safe and reliable.
“The joining of RMB in the SDR basket means the global community has greater expectations on China to play an active role in the world economic and financial arena”, the statement said.
Zhang Ming, a Chinese Academy of Social Sciences professor who specializes in worldwide investment research, said that the key factor in whether the yuan will overtake the pound and yen as a more popular reserve currency in the next decade is China maintaining growth of 6 to 7 percent.
The move to include the yuan was widely expected, and comes after reforms undertaken by the PBOC in recent months to secure its inclusion, including more frequent issuance of yuan-denominated bonds and commodity contracts, increasing access to Chinese currency markets for foreigners, and expanded yuan trading hours.
The desire of Chinese reformers to internationalise the currency has a clear economic rationale; a yuan in wide circulation overseas would reduce China’s dependence on the dollar system and on policy set in Washington. The yuan is now the most used currency for intra-regional payments in the Asia-Pacific, according to Fitch.
“Officials from many countries have told me that they have begun to use the yuan as a reserve currency, though we’re unable to put it in numbers”, he said.
“Inclusion of yuan in the basket doesn’t immediately change our current exchange rate system”, he added.
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On Oct. 20, the PBOC extended an agreement on a reciprocal currency swap scheme with the Bank of England to promote London as an offshore RMB center.
