International Monetary Fund approves China’s yuan as elite reserve currency

Starting in October of next year, the Chinese yuan will become one of the world’s elite currencies.

Wang Tao, chief China economist at UBS AG, said the SDR inclusion will accelerate renminbi internationalization, and is also a milestone in the integration of the Chinese economy into the global financial system.

International Monetary Fund members can use the Special Drawing Rights basket to obtain currencies to meet balance-of-payments needs.

The Chinese yuan was trading higher offshore since the International Monetary Fund decided to make it a part of the reserve currencies which was a move that was going to integrate China into a financial system that has been dominated by the US, Europe and Japan for decades.

New economic realityThis move is seen as a powerful symbol of China’s meteoric rise, from poverty to a pillar of the global economy.

The value of the U.S. dollar will account for just under 42-percent of the SDR value, while the euro will make up around 31-percent.

The ChiNext Index, which tracks China’s NASDAQ-style board of growth enterprises, dipped 0.64 percent to close at 2,655.35 points.

The ministry noted that it would continue to carry out the terms of its bilateral agreement, including the issuance of yuan-denominated foreign exchange stabilization bonds, to lay a stronger foundation for Korean financial institutions’ inroads into the Chinese bond market. Sterling and yen also shed their weightages, while dollar stayed intact with its previous status.

If the USA dollar does continue its upward trajectory, GaveKal believes that the People’s Bank of China “would not stand in the way” of a fall in the renminbi’s exchange rate from RMB6.4 now to RMB6.8 to the greenback, should the latter gain 10% or more over the next six to 12 months.

The SDR is an asset that functions nearly like a currency. The yuan already had met the IMF’s criteria for being widely used.

The IMF decision “shows global society’s recognition of China’s economic development, its reform and opening up, especially in the financial field”, said Zhao Xijun, deputy dean of Renmin University’s School of Finance, in Beijing. Mr. Yi announced that China will maintain a controlled float system before it gradually transfer to a free float which means the central bank stays out of control the value of currency.

On the possibility of rupee’s devaluation to keep pace with Chinese currency, Reserve Bank of India Governor Raghuram Rajan on Tuesday said the exchange rate is always market driven and it can not be manipulated.