IMF Adds China’s Yuan to Its Basket of Leading Currencies

The executive board of the International Monetary Fund on Monday approved including the Chinese yuan in its basket of currencies that it uses as an international reserve asset.

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. “Nobody needs to go out and buy renminbi tomorrow because it was put in the SDR basket – no one buys the SDR basket, but it’s a symbol that the International Monetary Fund approves of what the reformers have been doing with the currency”. It will now be a member in the IMF’s elite club called the Special Drawing Rights (SDR).

Authorities of all currencies represented in the SDR basket, which now includes the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the International Monetary Fund, its membership and other SDR users in their currencies.

That will create modest demand for the yuan, but more important is the prestige factor: The IMF’s stamp of approval gives the world’s second-largest economy new credibility in the financial markets, allowing it to be used more widely in trade and financial transactions. With the inclusion of the yuan, the dollar’s weight in the new basket will be little changed from its current 41.7 percent.

According to the Society for Worldwide Interbank Financial Telecommunication, renminbi now ranks fifth as a global payments currency and seventh as a global reserve currency. The renminbi will take its place alongside the dollar, the euro, the yen and the pound.

The People’s Bank of China, the country’s central bank, hailed the IMF’s decision.

“In particular, China can be expected to deepen its bond market and open its capital account wider to accommodate the desire of foreign central banks and institutional investors to hold more yuan assets”.

“With this decision, the International Monetary Fund is choosing to reward China’s currency manipulation instead of combating it”, said Senator Chuck Schumer, a New York Democrat and longtime China critic. The decision was based off the volume of exports involving the yuan and its use in the financial markets, among other factors. But SDR does have a price tag on it. At the moment the value of the SDR is determined on a daily basis by a basket of four leading currencies of the world: the USA dollar, euro, British pound, and the Japanese yen.

The Wall Street Journal said the IMF had conferred “a measure of global legitimacy to China’s currency as the government starts to liberalize its rigidly controlled exchange rate and financial system”.

Declines in retail shares after the Black Friday holiday shopping weekend pressured US stocks Monday.

SDR is not a currency like the dollar or yuan.

Skeptics will likely downplay the IMF’s decision, saying it is mostly symbolic for China and the country has further reforms to make before its currency becomes a force in financial markets.