International Monetary Fund approves Chinese yuan to become reserve currency

IMF Managing Director Christine Lagarde said in a press conference that the Chinese have reformed their economy to the point that its currency can be freely used in worldwide trade.

The yuan became the world’s No. 2 currency for global trade finance in 2013, and overtook the yen to become the fourth most-used world payment currency in August, only after the USA dollar, the euro and the sterling, according to the global transaction services organisation SWIFT.

“I actually think what Lagarde did – and this is just a real speculation on my part – she realised how bad things are in China, so what she made a decision to do was to throw China a lifeline”, Chang told CNBC’s “Squawk Box”.

But some critics cautioned that the nation’s possible heavy reliance on the yuan could increase Korea’s exposure to sudden global financial market shocks.

Analysts suggested the addition of the yuan could possibly foreshadow further weakness in the currency as, to be successful, the yuan would have to meet a strict set of criteria that only the pound, euro, dollar and yen have so far been able to achieve.

China’s central bank on Tuesday dismissed concerns over yuan depreciation after the currency’s entry to the IMF’s Special Drawing Rights (SDR) basket.

These include the adoption of a market-oriented daily exchange rate-fixing regime; allowing foreign central banks and global financial organisations to access the onshore bond and foreign exchange markets; and setting freer interest rates.

China asked becoming a reserve currency a year ago and is the planet ‘s second-largest market supporting the United States.

Effective from October 1, 2016, the yuan will be included in the SDR basket. As of now these banks hold about 780 billion yuan, or 1.1% of total foreign reserves held by central banks around the world.

On Monday, the International Monetary Fund completed its five-yearly review of the basket of currencies that make up the SDR and included the Chinese unit as one of the five currencies for the first time after concluding that it met all existing criteria. It is likely to have to appreciate against the US Dollar before it finds its natural value, but that remains a political question for the Chinese as much as an economic one.

The special drawing rights (SDR) system was created by the International Monetary Fund in 1969 to support the Bretton Woods fixed exchange rate system. The US has long suspected the Chinese of artificially undervaluing the Yuan to ensure that Chinese exports have an advantage in importing markets.