The addition of China’s yuan to the select basket of currencies used as a yardstick by the International Monetary Fund is a sign, experts say, that the yuan may one day become as recognizable as the dollar or euro.
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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”.
“The IMF endorsement is a bright spot in what has been a tumultuous year for the world’s second-biggest economy, which has been buffeted by slowing growth, a tumbling stock market and a shift by authorities toward a more market-oriented exchange rate”.
Lagarde called the decision “an important milestone in the integration of the Chinese economy into the global financial system”. That came after IMF staff concluded in a November 13 report that the yuan was “freely usable”, meaning widely used for worldwide transactions and widely traded in foreign exchange markets. Authorities of all currencies represented in the SDR basket, which now includes the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the International Monetary Fund, its membership and other SDR users in their currencies.
Although the decision has now been made, the earliest date for inclusion is October 2016.
At least 10% of global foreign currency reserves – $1 trillion – will switch into the yuan practically overnight, mostly at the expense of the USA dollar.
The SDR, created in 1969, gives International Monetary Fund member countries that hold it the right to obtain any of the currencies in the basket now the dollar, euro, yen and pound to meet balance-of-payments needs.
The main opponents of including the yuan as reserve currency have been Japan and the US.
However, the yuan is still tightly controlled by the People’s Bank of China, the country’s central bank. Chinese officials said the move was part of an effort to make the yuan rise and fall based more on market forces.
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According to research firm Capital Economics cited in the Financial Times’s Alphaville blog, understanding what the IMF’s reserve status means is the first step to understanding the impact of the renminbi’s inclusion.
