International Monetary Fund agrees to include China’s RMB in benchmark SDR currency basket

IMF Managing Director Christine Lagarde said in a statement that this inclusion marks an “important milestone”.

On top of that the yuan’s worldwide status will be determined by how much China is willing to reform its exchange and interest rate regimes, as well as the opening up and reforming of its financial markets to make them more aligned with the worldwide standards of other global markets.

The milestone inclusion of the RMB will take effect on October 1, 2016.

The Chinese yuan will join a basket of the world’s leading currencies.

The People’s Bank of China (PBOC) said on Tuesday there was no basis for the yuan to devalue in the long term and it would keep the currency basically stable, brushing aside speculation it would allow the yuan to depreciate after its SDR admission.

A country participating in this system needs official reserves such as government or central bank holdings of gold and widely accepted foreign currencies that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. The decision to add the yuan will likely increase demand for the currency. This is the second attempt by China to have its currency included in the basket. The SDR’s value is based on the basket of the four global currencies and SDRs can be exchanged for “freely usable” currencies.

Concerns about Beijing keeping the yuan artificially low to help exporters is one reason the currency has previously failed to meet the criteria for reserve currencies set out by the International Monetary Fund.

As a freely usable currency, the RMB will play an important role in the Fund’s operations as, in practice, the bulk of the Fund’s lending activities takes place in freely usable currencies.

The weighting of the other currencies in the basket is 41.73 per cent for the U.S. dollar, 30.93 per cent for the euro, 8.33 per cent for the Japanese yen and 8.09 per cent for the British pound.

The Chinese yuan was trading higher offshore since the International Monetary Fund decided to make it a part of the reserve currencies which was a move that was going to integrate China into a financial system that has been dominated by the US, Europe and Japan for decades. Central banks may need to increasingly pay attention to financial stability issues stemming from these risks and develop the appropriate macro-prudential tools. 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.