Chinese RMB Gets IMF Approval as Major World Currency

The International Monetary Fund agreed Monday to add the Chinese yuan to its reserve currency basket, according to CNBC.

It joins an exclusive group of currencies that now make up the IMF’s reserve basket: the USA dollar, the euro, the British pound and the Japanese yen.

She added it had been also a recognition of the improvement in reforming China’s monetary and fiscal systems the Chinese authorities have produced before years.

International Monetary Fund said the yuan’s inclusion will enhance the SDR’s attractiveness by diversifying the basket and making it more representative of the world’s major currencies.

The IMF board, which represented the fund’s 188 member countries, decided that the RMB “met all existing criteria”, the IMF said in a statement after completing the regular five-yearly review of the SDR basket here.

The Japanese yen is included in the SDR weighting because of the strength of the Japanese economy. Because Korea is one of the few financial centers right now which has a yuan market, that allows Korea to have more direct dealings with the yuan and perhaps gain more stability than perhaps if we just stick with the USA dollar. The decision was based off the volume of exports involving the yuan and its use in the financial markets, among other factors. Since the whole world including the USA has trade deficit with China, the global exposure of yuan will give competition to the United States dollar.

For China, the IMF’s approval of the yuan as an global reserve currency will likely boost the use of the pink banknotes in trade and investment in the mid- to long-terms. The IMF’s decision to recommend the renminbi for inclusion in the SDR is, if nothing else, a vote of confidence in the global importance of the renminbi and, concomitantly, in China’s enduring status as an economic superpower.

After the yuan’s inclusion into the IMF’s reserve currencies, the currency’s weighting in the SDRs will hit 10.92 percent, while the weighting of the USA dollar, the euro, the yen and the pound will be diluted to 41.73 percent, 30.93 percent, 8.33 percent, and 8.09 percent, respectively. Private sectors will also be encouraged to gradually buy more yuan-denominated assets.

China’s central bank, the People’s Bank of China (PBOC), announced on Tuesday that it welcomes the IMF’s decision and said that the move shows the IMF’s recognition of China’s economic development and reform achievements.