China has become the first developing country to have its currency placed in the International Monetary Fund's basket of lending reserves, which has always included the four big currencies of the developed world - the US dollar, the euro, the pound sterling and the Japanese yen. This is the second attempt by China to have its currency included in the basket.
The decision to add the yuan to the IMF's Special Drawing Rights currencies was made at a board meeting in Washington on Monday night (30 November). The IMF said the yuan "met all existing criteria" to be included as one of the currencies used for the global organisation's SDR.
China made its first attempt to have the yuan included in the SDR in 2010 but the currency failed to meet the requirement of being widely traded in the foreign exchange transactions. IMF Managing Director Christine Lagarde said the currency "met all existing criteria" and described the yuan's inclusion "as an important milestone in the integration of the Chinese economy into the global financial system."
More about the SDR
The SDR composition is reviewed every five years. The last change made to the SDR was in 2000, when the euro replaced the German mark and the franc.
The basket of currencies is a reserve asset created by the IMF in 1969 as a supplement to member countries' foreign exchange reserves and a financial instrument to help with liquidity to member nations facing a payment crisis. The SDR is not a currency, nor is it a claim on the IMF but it can be exchanged for freely usable currencies, effectively service almost as a currency.
It is generally used for transactions between the central banks and the IMF. It bears an interest rate, which is set each week. A total of 204.1 billion SDRs were created as of 10 September this year. This is equivalent to about $280b.
SDRs accounted for 2.4% of the global reserve assets last year. Any decisions affecting the composition of the SDR basket will take effect on 1 October 2016 to give users sufficient time to adjust for changes in the basket.
The Chinese currency will carry a 10.92% weight in the basket. The US dollar has the highest ranking with 41.73%, followed by the euro with 30.93%. The yuan's weighting surpasses that of the yen at 8.33% and the pound at 8.09%. Prior to the yuan inclusion, the weights of the currencies in the basket are: US dollar (41.9%), euro (37.4%), pound (11.3%) and the yen (9.4%).
Yuan inclusion symbolic
The BBC described the yuan's inclusion as a powerful symbol of China's meteoric rise, from poverty to pillar of the global economy. It noted that for China to join this small club is "quite a statement of how the world economy has changed." It said the main point is that the decision is "a new way of conveying the increasingly apparent message that China has a central role in driving the performance of the world economy."
The South China Morning Post said while any direct impact may not be immediately visible, the IMF's decision will push the government to continue helping its yuan capital market mature, with more diversified products and active market transactions both onshore and off."