International Monetary Fund approves yuan entry into global currency basket

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

The yuan, also known as the renminbi, will join the USA dollar, euro, Japanese yen and British pound next year in the basket of currencies the IMF uses as an global reserve asset.

Earlier this month, the IMF’s staff and Ms. Lagarde both recommended that the renminbi be included in the SDR basket, and the Board’s decision on Monday confirms this.

After completing its five-year review, the executive board deemed the renminbi suitable to be included in IMF’s leading reserve currencies, used for worldwide emergency lending to member countries. The IMF executive board reviews the SDR so it “reflects the relative importance of currencies in the global trading and financial systems'”.

She added it had been also a recognition of the improvement in reforming China’s monetary and fiscal systems the Chinese authorities have produced before years. The inclusion of the RMB is meant to enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.

Some analysts argue that including the yuan in the SDR basket will prompt central banks and private investors around the world to increase their yuan-denominated holdings.

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”.

Now just the USA dollar, the euro, the yen and the pound are in the group.

The move came as China strives to stabilize equity market volatility and slowing economic growth.

But the main point is that the decision is new way of conveying the increasingly apparent message that China has a central role in driving the performance of the world economy.

O’Neill said that without financial reforms and further opening up, China’s efforts to push for greater adoption of the yuan in global payments and trade would backfire because the currency would be exposed to more risks. It marks a key milestone in RMB internationalisation.

“On paper, entry into the SDR signifies that the International Monetary Fund considers the renminbi to be ‘freely usable.’ In reality, China maintains capital controls and the central bank has effectively reinstituted a soft peg to the USA dollar since the depreciation in August”, writes Chang Liu, China economist at Capital Economics.

At least 10% of global foreign currency reserves – $1 trillion – will switch into the yuan practically overnight, mostly at the expense of the USA dollar.

“The reformers in China have won a big victory”, Anderson said.