IMF promotes the Yuan to the Special Drawing Right Basket
By admin December 8, 2015

1234Last week, the International Monetary Fund’s (IMF) Executive Board recognized the Chinese yuan as one of the world’s elite currencies by approving the yuan for inclusion in its elite basket of reserve currencies, the Special Drawing Rights (SDR) basket. The SDR is an international reserve asset that was created by the IMF in 1969 to supplement its member countries official reserves.

Inclusion in the SDR basket is a milestone for China, which has been campaigning for years to have its currency recognized internationally. The IMF reviews the basket every five years to ensure the currencies in the basket reflect the importance of currencies in the global trading and financial systems, but previously China’s yuan has not meet the IMF’s inclusion criteria. The two criteria for inclusion are 1) the issuing country is among the largest exporters in the world, and 2) its currency is “freely usable.”

According to the IMF’s Managing Director, Christine Lagarde, “The Executive Board’s decision to include the RMB (Renminbi) in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”

This is the first time in over 15 years that the list of currencies comprising the SDR has been altered. That being said, on October 1st, 2016, China’s Yuan will take its place alongside the US dollar, British pound, Japanese yen, and the euro. Inclusion should boost the yuan on the world stage, raising the confidence levels of countries to hold the currency.

Beijing has historically kept tight control of its currency, often devaluing the yuan. The US government has previously criticized China for keeping the yuan artificially low to boost exports and manufacturing. More recently, however, Beijing has started loosening its grip as the Central Bank doubled the permitted trading range for the yuan. Moreover, a Central Bank official has recently promised that China will no longer devalue the yuan now that it has been accepted by the IMF in the SDR.

For China, inclusion of yuan in the SDR basket will elevate the country’s economic role in the global economy. According to the IMF, the yuan will make up 11 percent of the basket, more than the currencies of Japan and the UK. However, according to a foreign exchange analyst at Credit Suisse, Koon How Heng, “Beijing still needs to do more to open up China’s capital accounts and convince global reserve managers to invest meaningfully in Chinese reserve related assets.” Analysts are also concerned that the yuan may lose value, which is down nearly 3 percent in comparison to the dollar this year. Although some are skeptical of China and the yuan, analysts expect China to continue progressively reforming their monetary and financial systems after their recent promotion.


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