Chinese yuan to become global reserve currency

The executive board of the International Monetary Fund on Monday added China’s yuan to the basket of official world reserve currencies.

Approval was expected after IMF Managing Director Christine Lagarde announced November 13 that her staff recommended inclusion, a position she supported.

The fund said the yuan will make up 11% of the SDR basket, more than the currencies of Japan and the United Kingdom.

After completing its five-year review, the executive board deemed the renminbi suitable to be included in IMF’s leading reserve currencies, used for global emergency lending to member countries.

Inclusion in the International Monetary Fund basket would force China to loosen its grip on management of the currency and could lead to demands for more transparency from its central bank as well as further financial reforms.

Despite some remaining controls on the capital account, the yuan is already freely usable for countries in worldwide payments and currency trading.

“Being the largest offshore RMB business centre with close economic and trade ties with Mainland China, Hong Kong should seize this historic opportunity and continue to strengthen our financial market infrastructure, as well as upgrading our talent pool and products”, said HKMA’s Chan, referring to the renminbi.

PBOC said in a statement released on Dec 1 that the IMF’s call was an acknowledgment of China’s economic development, reform and opening up.

In the face of slowing economic growth in China, analysts have acknowledged there have been some worrying signs that the government is either trying to roll back on some key financial reforms – or that the chaps in charge really don’t know what they’re doing.

There will be many more details that need to get worked out before the yuan actually becomes a viable reserve currency.

But Beijing has begun to loosen its grip – last year, the central bank doubled the permitted trading range for the yuan.

It’s clearly become an ambition for the powers that be in Beijing to see the yuan become a true global currency – alongside the U.S. dollar, the yen and the euro.

The yuan will come in with a higher weight than sterling and yen, which will drop to 8.09 percent and 8.33 percent respectively, while the dollar remains broadly unchanged at 41.73 percent.

By then, Zhou said he expected more than a third of the world’s global trade to be conducted through the RMB. There’s a good deal of wonkery in how the relative values of the currencies comprising the basket set the terms of IMF loans (the Fund itself has a helpful fact sheet outlining some of the quantitative underpinnings of the basket).

Tan Yaling, Head of China Forex Investment Research Institute, believes the move is a recognition of Chinese currency in the global society. The specifications of becoming a reserve currency mean that China’s ability to manipulate the renminbi will now be limited.