Statement of International Monetary Fund executive board on including yuan in SDR basket

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

The SDR basket is typically reviewed every five years by the IMF’s executive board to ensure it “reflects the relative importance of currencies in the global trading and financial systems”.

It also means the worldwide community expects China to play a bigger role in the global economic and financial system, the statement continued.

To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours.

The Chinese renminbi edged lower against the dollar on Monday after the International Monetary Fund voted to include the currency in its lending basket for reserve currencies.

SDR inclusion of the yuan, also known as the renminbi, has always been one of Beijing’s goals. To accommodate the yuan, the weighting of the EUR was reduced most to 30.93 per cent from 37.4 per cent previously, followed by GBP to 8.33 per cent from 11.3 per cent and JPY to 8.09 per cent from 9.4 per cent. The change was minimal for the United States dollars whose weighting was lowered to 41.73 per cent from 41.9 per cent. Coincidentally, these changes were reflected in the yuan’s appreciation against the EUR, GBP and JPY in the past month.

The yuan bounced back in a volatile trade on the day when the International Monetary Fund is expected to add the currency to its benchmark currency basket on Monday. They estimate the yuan will make up 10 percent of the IMF’s SDR basket.

But, as The New York Times notes: “The changes could inject volatility into the Chinese economy, since large flows of money surge into the country and recede based on its prospects”. Since its value has been connected to the four currencies, any holder can trade it with other countries, or holders, for any of the four currencies when faced with a reserve shortage and seeking more liquidity.

Both sources said that the Central Bank has not carried out any operations on physical buying of the yuan yet. Under new scrutiny system, China will have to liberalize its financial system and open the system for examination from the International Monetary Fund.

The decision, which approved would go into effect next September, is sure to raise questions as to the continued hegemony of the US “greenback” as the world’s reserve currency.

It wrote in an update on China last week that the yuan was expected to see widespread adoption as a reserve currency globally. Standard Chartered PLC predicts the inclusion could spur up to $1 trillion of net purchases of China’s onshore bonds by the end of 2020.