China Voice: Yuan and SDR

The International Monetary Fund (IMF) will add the Chinese yuan into its basket of global reserve currencies alongside the U.S. dollar, the euro, the British sterling and the Japanese yen. Other currencies in the basket include the dollar, euro, pound, and yen. “We expect China will fasten the reforms for domestic and foreign bond investors and issuers”, Moody’s managing director Ivan Chung said.

The fund said the yuan would have a 10.92 per cent weighting in the basket.

“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. “And perhaps with the Chinese inclusion in the SDR basket, you may see a little more of that (devaluation)”, he said speaking at a press conference after the central bank’s monetary policy announcement on Tuesday.

The IMF yuan reserve currency approval ensures that the days of the dominance of the USA dollar are coming to an end.

The IMF requires currencies included in the Special Drawing Rights to be “freely usable” and traded widely in foreign exchange markets.

Prasad says including the yuan in the SDR could “strengthen the hand of economic reformers in China” to implement further changes and further open markets. Private sectors will also be encouraged to gradually buy more yuan-denominated assets.

The specifications of becoming a reserve currency mean that China’s ability to manipulate the renminbi will now be limited. It now ranks fifth as a global payments currency and seventh as a global reserve currency, according to the Society for Worldwide Interbank Financial Telecommunication.

The SDR basket is typically reviewed every five years by the IMF’s executive board to ensure it “reflects the relative importance of currencies in the global trading and financial systems”.

In practice, what determines whether central banks are willing to consider a currency a reserve asset is their confidence that they can sell that asset whenever needed into deep and liquid markets. “It’s important to keep the renminbi at a reasonable and equilibrium level”.