China urged to continue RMB reform after inclusion into SDR

It brings the renminbi, or the yuan, into an exclusive group of currencies that make up the IMF’s own reserve basket, which is now comprised of the United States dollar, the euro, the British pound and the Japanese yen.

“The addition and inclusion of the renminbi in the SDR basket of currencies is a recognition of the significant reforms which have been conducted of the significant opening up of the Chinese economy”, the agency’s managing director, Christine Lagarde, said.

Yesterday, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said Malaysia welcomes IMF’s move to declare the yuan as a reserve currency as it would promote stability in the global monetary system and help pave the way for broader use of the yuan in trade and finance.

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.

IMF’s Executive Board revised the Special Drawing Rights (SDR) basket and included CNY in the basket which will be effective from October 2016 and continue for next five years.

China is the world’s second largest economy behind the U.S. and asked for the Yuan to become a reserve currency a year ago. For example, the International Monetary Fund determined the RMB is “freely-useable” but it is not fully convertable into other currencies.

Without the inclusion of the yuan, the representativeness of the SDR and the legitimacy of the International Monetary Fund would have been questioned.

The central bank will keep intervene in currency markets to prevent excessive fluctuations recently, Mr. Yi said: “It’s important to keep the yuan stable at a reasonable and equilibrium level”.

“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”.

Yuan also known as the Chinese Renminbi (RMB) was included in the basket after it met the existing criteria for its inclusion.

Such a move from the IMF at a time when the Chinese economy is slowed down and has been overtaken by India in terms of growth rate, is seen by many experts a move by the worldwide body to encourage China for a new set of economic reforms.

For the past year, the amount of average daily transactions of won-yuan direct trading stood at around two.two billion dollars.

“The development of the yuan is going to be an important one for people’s portfolios and [investors should] start looking to China’s assets”, he said.

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. “We remain long USD/CNY via call spreads”, economists at Barclays said in a research note sent to clients last week.