International Monetary Fund to include Chinese renminbi in currency basket

The currency will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR, which determines which currencies countries can receive as part of International Monetary Fund loans.

“The continuation and deepening of these efforts will bring about a more robust worldwide monetary and financial system, which in turn will support the growth and stability of China and the global economy”, she added.

As the Chinese renminbi (RMB) joins the league of global reserve currency along with the USA dollar, British pound, euro and the Japanese yen, Jameel Ahmad, Chief Market Analyst at ForexTime- a Europe-based forex think tank- throws some light on its long- and short-term impact on the global currency markets.

An global reserve asset, SDR was created by the IMF in 1969 to supplement the official reserves of member countries.

To meet the IMF’s “freely usable” criteria, Chinese authorities undertook a series of reforms in recent months, such as improving its foreign exchange rate formation system, opening up its interbank bond and forex markets, and improving data transparency by subscribing to the IMF’s Special Data Dissemination Standard (SDDS).

“There’s no ground for continued devaluation of renminbi as China’s economy keeps growing at a speed of medium-to-high level with a huge trade surplus and ample foreign exchange reserve”, said Yi Gang, vice-governor of the People’s Bank of China, as reported by China Daily.

Lagarde said that the decision was made after RMB met all existing criteria.

“There is no obligation for central banks to align their forex reserve holdings with the SDR basket, but in practice, they pay a lot of attention to the basket’s composition and weights”, said Dariusz Kowalczyk, senior emerging market strategist at Credit Agricole.

Hong Kong’s South China Morning Post has the details. It said the main point is that the decision is “a new way of conveying the increasingly apparent message that China has a central role in driving the performance of the world economy”.

However, the prestige benefits could “raise the RMB’s profile as a global reserve currency, prompting central banks, sovereign wealth funds and reserve managers to allocate towards RMB assets for their portfolio”. The move, while largely symbolic, is seen as potential impetus for China to continue on a path of freeing up its tightly controlled financial system.

The decision to add the yuan to the IMF’s Special Drawing Rights currencies was made at a board meeting in Washington on Monday night (30 November).

The honour paves way for wider use of renminbi in trade and finance besides exalting China’s standing as a global economic power.