Chinese yuan joins IMF SDR basket
CHINA’S yuan has entered the International Monetary Fund’s elite SDR basket of currencies, elevating Beijing’s banknotes into a family long exclusive to global reserve assets.
A symbolic coup for policymakers in Beijing, the move represents a milestone in raising the economic profile and prestige of China, the world’s second-largest economy, and the success of a long-running effort by the People’s Bank of China.
The move formally occurred on October 1, with the yuan’s induction following a decision first announced in November last year, when the IMF found that China’s currency met the standard of being “freely usable”.
The yuan now joins an exclusive club also comprising the US dollar, pound, yen and euro.
In an announcement of the change, IMF managing director Christine Lagarde said the inclusion of the yuan, also known as the renminbi, showed China’s improved stewardship of its economy.
“The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange and financial systems and acknowledges the advances made in liberalising and improving the infrastructure of its financial markets,” she said.
Beijing has moved haltingly to expand use of the yuan, which has doubled its share of global currency trading to an average daily turnover of US$202 billion since 2013.
The yuan has moved into the top 10 but still trails the other major currencies, according to the Bank for International Settlements.
Created in the 1960s, the “Special Drawing Right” is a unit of account used by the IMF as a foreign exchange reserve asset and is not a freely traded currency.
To help manage financial crises, the IMF issues loans to member countries denominated in SDRs.
Chinese authorities have progressively allowed the yuan to trade directly against other major currencies, adding the pound and euro in 2014. That year, Beijing asked for the yuan to be included the SDR basket.
In August of last year, China suddenly devalued the yuan, causing investors to dump the currency in volumes not seen since 1994 and sparking an outflow of capital from China. The yuan has fallen 8 percent against the US dollar over the last two years.
The SDR inclusion could push central banks and sovereign funds to diversify further by increasing their yuan holdings.
The yuan enters the SDR basket with a weight of 10.92pc, versus 41.73pc for the dollar and 8.33pc for the yen.
However, Julian Evans-Pritchard, a China specialist at Capital Economics, said the yuan’s inclusion was not likely to drive foreign demand for it.
“Contrary to common belief, this does not require that IMF members shift out of euro, yen and sterling assets into renminbi assets. It simply means that the renminbi exchange rate will begin to influence the value of SDRs,” he said. –
The renminbi joined the IMF’s basket of reserve currencies this week.