The International Monetary Fund has added the Chinese renminbi to the world’s basket of reserve currencies, an acknowledgment of China’s economic importance.
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It joins an exclusive group of currencies that now make up the IMF’s reserve basket: the Us dollar, the euro, the British pound and the Japanese yen.
Mr. Yi said China’s long-term goal is to allow a “clean float” of the yuan – meaning the central bank will stop intervening in currency markets to control the yuan’s value.
An global reserve asset, SDR was created by the IMF in 1969 to supplement the official reserves of member countries. Before this announcement, the yuan, also called the renminbi or the RMB, reversed its losses because of speculation that the Chinese banks had sold the dollar in order to support the yuan. The decision was based off the volume of exports involving the yuan and its use in the financial markets, among other factors.
The worldwide status of the yuan will also depend on the development of financial markets in China and progress in reforming the exchange and interest rate regimes, he said.
China’s yuan has just won promotion to the premier league of global currencies.
Replying to a question on internationalisation of the Indian rupee in the wake of IMF’s move, Reserve Bank of India Governor Raghuram Rajan on Tuesday said that the Indian financial system is actually ahead of China in some dimensions. The IMF said the RMB will make up 10.92% of the basket, higher than the yen and pound, though still much lower than the U.S. dollar’s weighting.
The IMF reviews the currencies in the SDR basket every five years, and whether to add the RMB to the basket is a major issue for this year’s assessment.
These reform efforts will improve the finance systems, and will ultimately improve the growth and stability of China’s economy as well the global economy. The reality, however, is that SDR membership is largely irrelevant to the renminbi’s exchange rate.
Overall, it has raised the brand image and expectations of the currency and the renminbi will become a more stable currency, a more acceptable currency around the world and people will become more confident to hold renminbi assets.
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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 global monetary system.
