IMF to add yuan to SDR reserve currency basket

The IMF said the yuan “met all existing criteria” to be included as one of the currencies used for the global organisation’s SDR.

“My view is that if the Chinese follow the IMF’s advice of allowing their currency to be more market determined and to further open up their capital account, the Chinese currency would depreciate a lot as Chinese residents would send capital overseas”, he tells The Daily Caller News Foundation. The move is a key step in a decades-long ascent toward worldwide credibility for the currency, which was created after World War II and for years could be used only domestically in the Communist-controlled nation. Under the new weightings, the euro’s share will drop to 30.93 per cent. Sterling and yen will also have lower weights while the dollar remains about the same. It gives any International Monetary Fund member countries a right to obtain any currency from the basket.

According to Christine Lagarde, Managing Director of the International Monetary Fund, it is an important milestone in the integration of the Chinese economy into the global financial system. More importantly, the IMF’s decision comes at a crucial time for the Chinese leadership as it seeks to demonstrate to constituents worldwide recognition of China’s rise as a global power.

 “Going forward, China will continue to deepen and accelerate economic reforms and financial opening up, and contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance”, – the PBOC said in a statement.

Member countries and the market will now make preparations ahead of the October 1, 2016 date for inclusion of the RMB. However, despite these efforts the monetary policy restrictions and other institutional barriers have so far weighed down heavily on the Chinese efforts to make Renminbi an global reserve currency. Until 1980, the basket was 16 currencies including Iran and South Africa but that was reduced. The measures include having a direct won-yuan exchange market in Seoul and plans to issue yuan-denominated foreign exchange stabilization bonds in China. In determining if the Yuan should be included, it must be “a freely usable currency’, which the Yuan was not up until recently”.

Speaking at a news conference on Tuesday, Mr. Yi said the central bank doesn’t see reason for depreciation, pointing to China’s economic strength and ample foreign-exchange reserves.

The entry itself into the special drawing right is mainly symbolic.

“There’s this obsession with the [special drawing rights], and it’s completely out of proportion to its economic impact, which is likely to be trivial”, said Randall Kroszner, a former Federal Reserve Board governor who is now an economics professor at the University of Chicago.