International Monetary Fund board approves inclusion of Chinese yuan in reserve currencies basket

China’s currency will be added to the list, which now includes the USA dollar, the euro, the Japanese yen and the British pound, from October 1, 2016.

The IMF decision coincided with the expectations of worldwide analysts and experts who have long talked about the need for recognition of the role of China in global trade.

However, Barry Eichengreen, a professor at the University of California Berkeley, said that the IMF’s decision is symbolic because many investors were already aware of the rising status of the yuan as an global currency.

“Traders would shift to use more Chinese yuan, as they will not have to pay for foreign-exchange fees converting into the United States dollar or other currencies”, she said.

The desire of Chinese reformers to internationalise the currency has a clear economic rationale; a yuan in wide circulation overseas would reduce China’s dependence on the dollar system and on policy set in Washington.

IMF Managing Director Christine Lagarde said in a statement that this inclusion marks an “important milestone”. It will be the third highest weighting following the dollar and the euro. So far the honour is limited to just four currencies – the dollar, the euro, the pound and the yen, reports New York Times.

Many observers say it’s the market itself, rather than the renminbi’s addition to the SDR basket, will determine whether or not the yuan will become a major global reserve currency.

“Markets in China have yet to evolve further in terms of breadth, depth and institutions”, said a foreign central banker, speaking on condition of anonymity, saying he expects any increase in the offshore yuan pool to happen slowly.

“The renminbi’s inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented and is a clear, stronger representation of the global economy”, Lagarde said.

The International Monetary Fund on Tuesday formally approved China’s currency as one of the world’s elite monies – a sign of improving financial times in the world’s most populous nation.

Mr Bridges argued that the weighting given to the renminbi – 10.92 per cent – and changes made to the weighting of other currencies is also significant.

The decision which came on Monday after the quinquennial review of the SDR (Special Drawing Rights) basket of the International Monetary Fund is expected to strengthen the Chinese yuan’s position in the global exchange market. 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.