The average is used as a measure of value for the IMF’s “special drawing rights”, which quantify how much reserve currency each of the 188 member countries can call on.
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The IMF designation has been one of China’s economic policy priorities for several years and the road to Monday’s decision has indeed been a long and often bumpy one in order to meet the necessary criteria.
The Chinese currency will carry a 10.92% weight in the basket.
The Chinese government has been touting the inclusion of the renminbi into the SDR basket as a milestone in its push to make the Chinese currency more worldwide.
However, such a development will not be achieved overnight and depends on reforms undertaken by Beijing, including opening its tightly-controlled onshore financial market, allowing more capital outflows and widening the trading band for the yuan, ANZ Banking Group said.
He said Lagarde was determined to include the yuan in the basket in a bid to prod China toward establishing full convertibility for its currency. In other words, the concerned currency that is to be included in the basket are those issued by International Monetary Fund members or currency unions that play a central role in the global economy.
With only 38 central banks holding yuan-denominated reserves, many say that including the yuan in the SDR basket will prompt central banks and private investors around the world to increase their yuan-denominated holdings.
Renminbi is the official name of the currency introduced by the Communist People’s Republic of China at the time of its foundation in 1949.
The dollar “remains the reserve currency of the world for a good reason”, Lew said in a Bloomberg Television interview Tuesday in Washington when asked if the USA would consider converting any of its foreign-exchange reserves to yuan.
Yuan’s inclusion will be effective from October 1, 2016, the International Monetary Fund said after the review meeting of its Executive Board.
However, the weighting of the euro, sterling and yen will be lowered.
Nikko Asset Management chief global strategist, interest rates and currencies Roger Bridges said the inclusion reinforces the importance of China’s ongoing reform agenda. It noted that for China to join this small club is “quite a statement of how the world economy has changed”.
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Mr Bridges pointed out that the euro’s re-weighting accounts for 60 per cent of the total movement, with the pound accounting for another 30 per cent. He said this signifies that the European crisis “mucked-up” the continent’s chance to act as a second reserve currency.
