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.”