IMF Adds Chinese Yuan to Reserve Currencies

China has been careful of late to reset onshore trade of its currency to reflect offshore market movements as part of a campaign to liberalise what is primed to become one of the world’s most important monetary units.

Over the past year, China has rolled out a series of policies – including freer interest rates and easier foreign investor access – to meet the IMF’s criteria for yuan inclusion in the SDR lending basket.

The International Monetary Fund (IMF) is expected to give the yuan a vote of confidence on Monday and include the Chinese currency in its Special Drawing Rights (SDR) that unites the US dollar, euro, British pound and the Japanese yen.

According to Benjamin J. Cohen, professor of worldwide political economy at the University of California, the renminbi’s addition is an important step in global recognition.

“It wants to show yuan is widely traded and freely usable by the International Monetary Fund definition”, said Lundsager, now a senior researcher with the Wilson Center, a Washington-based think tank.

The IMF decision is both an overdue recognition of China’s importance in the world trading system, and an encouragement to reformers in the Chinese leadership to keep pressing ahead with a process of liberalisation.

The already close economic ties between South Korea and China will receive a further boost from the yuan’s inclusion in the International Monetary Fund’s (IMF) reserve currency basket, local observers said Tuesday.

For other countries, a more internationalized yuan and a more opened capital market in China will not only help diversify their foreign reserves to descend financial risks, but also release more dividend for China’s neighbors and partners and generate more chances of investment and win-win results.

“Any change regarding which currency to use to settle their accounts cannot be taken quickly, although having greater options can make firms less reliant on a single currency, which can be a good thing”, said an official at a local business group.

China asked becoming a reserve currency a year ago and is the planet ‘s second-largest market supporting the United States.

Besides the symbolic weight it carries, the International Monetary Fund label brings specific benefits.

Rather, the trend will happen gradually as central banks look to diversify away from G-10 currencies, she said, adding that she expects a 1 percent annual reallocation of global FX reserves into China on an annual basis in the coming five years. Indeed, the SDR inclusion has arguably been the most attractive lure for Beijing to undertake a series of reforms of China’s financial regime.

The IMF decision also says a lot about the waning influence of Europe.

The IMF declined to admit the yuan in its 2010 review of SDR constituents saying it was used by relatively few countries for global transactions and that it was being manipulated by the People’s Bank of China to accommodate the China’s export drive.

Will demand suddenly jump for renminbi-denominated assets?