The International Monetary Fund will add the yuan to its basket of benchmark reserve currencies, which China said is a milestone in the currency's history and a vote of confidence in the country's financial reforms.
During a meeting on the regular five-yearly review of the Special Drawing Rights (SDR) basket, the IMF executive board, which represents the fund’s 188 members, decided that the RMB “met all existing criteria,” the Washington, DC-based international lender said in a statement.
From October 1st next year, the yuan will join the dollar, euro, pound and yen in the IMF's SDR basket. Approval had been widely expected after IMF managing director Christine Lagarde announced last month that her staff recommended inclusion, a position she supported.
Ms Lagarde said the decision was “an important milestone in the integration of the Chinese economy into the global financial system.”
“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,” Ms Lagarde said.
The yuan will have a weighting of 10.92 per cent in the new SDR basket, while respective weightings of other currencies in the basket are 41.73 per cent for the US dollar, 30.93 per cent for the euro, 8.33 per cent for the Japanese yen and 8.09 per cent for the British pound.
Created by the IMF in 1969, the SDR is an international reserve asset created to supplement its members’ official reserves. It can be exchanged among governments for freely usable currencies in times of need.
UBS economist Wang Tao expects a five per cent depreciation of the yuan against the US dollar in 2016, most likely in a gradual rather than a one-off manner.
“While joining SDR may not bring immediate material benefit to China, the significance has and will continue to lie in all the necessary financial reforms and capital account opening to achieve the positive outcome and further advancing RMB internationalisation,” Ms Wang said in a research note.
“These reforms are considered critical by the government in helping to improve the efficiency of capital allocation in China.”
China’s central bank, the People’s Bank of China (PBoC), said that it welcomed the IMF decision to include the yuan, also known as the renminbi (RMB), in the SDR basket, saying the move shows the IMF’s recognition of China’s economic development and reform achievements.
“The joining of RMB in the SDR basket means the international community has greater expectations on China to play an active role in the world economic and financial arena,” the PBoC said in a statement.
Qu Hongbin, Chief China Economist at HSBC, said the decision was in line with the bank’s and market expectations.
The IMF reviews the composition of the basket every five years. The fund rejected the yuan for inclusion during the last review, in 2010, saying the currency didn’t meet the necessary criteria.
– Additional reporting Bloomberg
