The yuan in the SDR: Good or bad for China?
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The yuan, also known as the renminbi, will join the likes of the U.S. dollar, the British pound and the euro in the basket known as the Special Drawing Rights.
The yuan will come in with a higher weight than sterling and yen, which will drop to 8.09 percent and 8.33 percent respectively, while the dollar remains broadly unchanged at 41.73 percent.
The move is a key step in a decades-long ascent toward global credibility for the currency, which was created after World War II and for years could be used only domestically in the Communist-controlled nation.
Despite the fact that the yuan is not yet fully convertible, the International Monetary Fund ruled that it had met the criteria for inclusions of being “freely usable”. She said Malaysia’s central bank is comfortable with its current holdings of renminbi and expects some Southeast Asian countries with significant trade with China to increasingly use the yuan for bilateral trade to reduce volatility. How fitting for a currency which literally translates to the “people’s currency” in Mandarin.
Prior to the inclusion of the yuan, the only currencies comprising the reserve basket were the US dollar, the euro, the British pound and the Japanese yen. SDRs are the accounting unit of the International Monetary Fund and their value is based on a weighted average of the basket currencies.
Concerns about Beijing keeping the yuan artificially low to help exporters is one reason the currency has previously failed to meet the criteria for reserve currencies set out by the International Monetary Fund.
“So it’s very important to keep China on path of reform”.
The IMF conducts a review of the SDR currencies every five years. It may also affect the scale of inflows the Chinese currency receives in the coming months.
The IMF decision is both an overdue recognition of China’s importance in the world trading system, and an encouragement to reformers in the Chinese leadership to keep pressing ahead with a process of liberalisation.
China and global financial security. The specifications of becoming a reserve currency mean that China’s ability to manipulate the renminbi will now be limited. The U.S. supported the fund’s staff recommendation to add the yuan, the Treasury Department said in an e-mailed statement without elaborating.
“It is a historic moment in global finance for an emerging market economy, with a per capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world’s major reserve currencies”, said Prasad, a former IMF chief in China.
Adams said that rising demand may be “evolutionary” and “a process that will likely be pronounced”.
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“If part of their policy is to gradually liberalize the capital account and the financial sector, this is setting in motion a process of opening up that can not be reversed”, Angel Udibe, a financial markets expert at the Peterson Institute for International Economics, told AFP.
