The yuan’s entry into the basket takes effect on October 1, 2016.
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According to Christine Lagarde, the Managing Director of the IMF, it’s a recognition of the amount of progress that Chinese authorities have been making in the past few years while reforming the monetary as well as financial systems of the country.
Analysts suggested the addition of the yuan could possibly foreshadow further weakness in the currency as, to be successful, the yuan would have to meet a strict set of criteria that only the pound, euro, dollar and yen have so far been able to achieve. A reserve currency is regarded as a strong currency, widely used in worldwide trade and that central banks will hold as a component of their foreign exchange reserves.
It is used for transactions between central banks and the International Monetary Fund, and is used to decide the currency mix that countries like Greece, for example, receive when the International Monetary Fund provides financial aid. The yuan has more weight than the yen and pound.
The Chinese currency will have a ten-point-92 percent weighting in the SDR basket.
However, the weighting of the euro, sterling and yen will be lowered.
The International Monetary Fund on Monday designated the Chinese renminbi as one of the world’s elite currencies, a major milestone that underscores the country’s rising financial and economic heft. China requested that the Yuan be given reserve currency status previous year. It was around 0.61 percent softer than the onshore spot rate on Tuesday, after it staged a short-lived bounce to 6.4160 right after the IMF’s SDR announcement. The Chinese government, however, still pegs its currency to the dollar.
Martin Wolf, the chief economic commentator for the Financial Times newspaper, said the IMF’s decision will have little impact on the use of the yuan internationally given that the SDR regime has been marginalized in the worldwide monetary system.
If the U.S. dollar does continue its upward trajectory, GaveKal believes that the People’s Bank of China “would not stand in the way” of a fall in the renminbi’s exchange rate from RMB6.4 now to RMB6.8 to the greenback, should the latter gain 10% or more over the next six to 12 months.
“Over the long term, it should help increase demand for RMB assets, if China continues to deepen its domestic bond market and continues its financial market reforms including capital account liberalization”.
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“The inclusion of RMB in the global reserve currency list will put pressure on China to open up its market and bring more transparency in its financial system”, Rakesh Mohan Joshi of the Indian Institute of Foreign Trade (IIFT) told The Dollar Business.
