International Monetary Fund includes Chinese Yuan in reserve currency basket

Although the renminbi’s inclusion will be viewed as recognition of the strides that the Chinese authorities have made to reform and open up its economy, GaveKal says that the move is “largely symbolic” and challenges remain ahead for the currency.

On one hand, SDR inclusion will encourage beefed up allocations to renminbi assets from reserve managers at other central banks, ‘ said economist Chen Long.

In August, China surprised markets by repeatedly devaluing the yuan amid signs of a slowdown in the Chinese economy, adding to concerns China may control the yuan’s value to give its exports a competitive edge.

Nikko Asset Management chief global strategist, interest rates and currencies Roger Bridges said the inclusion reinforces the importance of China’s ongoing reform agenda.

The IMF will include the Chinese currency to its SDR basket from October 1, 2016 with a weighting of 10.92 per cent, as the currency has “met all existing criteria”.

IMF managing director Christine Lagarde called the decision “an important milestone” in the integration of China’s economy into the global financial system, and said it also recognizes the progress that Chinese authorities have made in recent years in reforming monetary and financial systems.

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

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

Because Korea is one of the few financial centers right now which has a yuan market, that allows Korea to have more direct dealings with the yuan and perhaps gain more stability than perhaps if we just stick with the USA dollar.

In the last few months, China has stepped up its game to expand the currency’s global standing, building trading hubs in Europe and issuing renminbi-denominated bonds and commodity contracts.

Freely Usable Criterion: To join the basket, a currency must also be judged by the IMF’s executive board to be “a freely usable currency”.

The U.S. Treasury Department is in support of the IMF’s decision to include the renminbi in the SDR. “MAS has worked closely with the People’s Bank of China on initiatives to promote greater use of the RMB in Singapore and the Southeast Asian region, and we look forward to further strengthening cooperation…to help foster a resilient and thriving RMB ecosytem in the region”, an MAS spokesperson said. The yuan’s weighting surpasses that of the yen at 8.33% and the pound at 8.09%.