The IMF on Monday admitted China’s yuan into its benchmark currency basket, in a victory for Beijing’s campaign for recognition as a global economic power.
The decision to add the yuan, also known as the renminbi, to the special drawing rights (SDR) basket alongside the US dollar, euro, pound sterling and yen, is an important milestone in China’s integration into global finances and a nod to the progress it has made with reforms.
To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours.
IMF managing director Christine Lagarde, who along with in-house experts had previously given her support for the inclusion, made it clear she did not expect Beijing to stop there.
“The renminbi’s inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented,” Lagarde told reporters.
The People’s Bank of China (PBOC) said the move, which was backed by countries including the US, the UK and Japan, showed the international community expected China to play a bigger role in the world economy.
“Going forward, China will continue to deepen and accelerate economic reforms and financial opening up, and contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance,” the Chinese central bank said in a statement.
PBOC Vice Governor Yi Gang (易綱) said he expected the inclusion would make the yuan more stable and there was no basis for it to devalue further, as some traders had expected.
An IMF official said it was not IMF policy to disclose board voting records, but a person familiar with the group’s deliberations said approval had been unanimous.
The yuan will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR that also cut the euro’s share by more than 6 percentage points to 30.93 percent.
The yuan will come in with a higher weight than the sterling and the yen, which will drop to 8.09 percent and 8.33 percent respectively, while the US dollar remains broadly unchanged at 41.73 percent.
To be included in the SDR basket, the yuan had to meet the criteria to be “freely usable,” or widely used to make international payments and widely traded in foreign exchange markets, a yardstick it missed at the last review in 2010.
The yuan’s inclusion from October next year is largely symbolic, with few immediate implications for financial markets. However, it is the first time an additional currency has been added to the SDR basket, which determines which currencies countries can receive as part of IMF loans.
“Ultimately China would like to see, as a number of countries would, the dollar end its reign as the global reserve currency,” Stewart Capital Advisors chief investment officer Malcolm Polley said. “That won’t happen until there is another currency that from a geopolitical standpoint is as secure as the dollar.”
The IMF said China’s comparatively higher interest rates would likely increase the SDR interest rate, potentially pushing up the cost of IMF loans for some borrowers.
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