The Yuan as a Global Currency

The International Monetary Fund has added the Chinese renminbi to the world’s basket of reserve currencies.

Kin Cheung / AP

The International Monetary Fund has added the Chinese renminbi to the world’s basket of reserve currencies, an acknowledgment of China’s economic importance.

In a statement, the IMF said that its executive board decided that starting October 1, 2016, the Chinese currency, which is more commonly known as the yuan, will be freely usable, and join the U.S. dollar, the euro, the Japanese yen, and the British pound in the basket of currencies that make up the Special Drawing Right.

“The Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system,” Christine Lagarde, the IMF’s managing director, said in a statement. “It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”

Here’s more on the move from The Wall Street Journal:

It confers a measure of international legitimacy to China’s currency as the government starts to liberalize its rigidly controlled exchange rate and financial system.

For the Chinese, it is a matter of prestige, a plank in Beijing’s strategy to elevate the country’s economic role in the global economy as it challenges U.S. political and economic dominance around the world.

But, as The New York Times notes: “The changes could inject volatility into the Chinese economy, since large flows of money surge into the country and recede based on its prospects. This could make it difficult for China to maintain its record of strong, steady growth, especially at a time when its economy is already slowing.”

The IMF reviews the SDR’s currency composition every five years. In 2010, it rejected the yuan because, the Fund said, it didn’t meet the necessary criteria. The yuan’s addition to the currency basket is the first since the euro was adopted in 1999. The common European currency replaced the old German and French currencies.

Bloomberg adds the yuan will have a 10.92 percent weighting in the currency basket. The dollar is weighted at 41.73 percent (from the current 41.9 percent), the euro at 30.93 percent (from 37.4 percent) , the yen at 8.33 percent (from 9.4 percent), and the pound at 8.09 percent (from 11.3 percent). Here’s more on the move’s likely impact:

Approval is unlikely to have much impact on short-term demand for the yuan, given the SDR’s minor share of global reserves, according to economists at banks including HSBC Holdings Plc and ING Groep NV. But the backing of the IMF, as well as the financial reforms required for China to secure and maintain it, could propel use of the yuan past the pound and yen over the medium term, said Viraj Patel, a currency strategist at ING Bank in London. …

The decision should boost efforts by Xi to open up China’s financial markets. China implemented a series of reforms to win IMF support, such as opening its onshore bond and currency markets to foreign central banks and reporting its reserves to the IMF.