The yuan makes its entry to the club of the main international currency reserves by joining the unit of account of the International Monetary Fund. An ambition that China has cultivated for years. Shareholders in the International Monetary Fund voted on Monday to let the Chinese yuan (CNY) into the fund’s basket of reserve currencies. It will now be a member in the IMF’s elite club called the Special Drawing Rights (SDR).
China weighs heavy in the world economic exchange market, but it had a regret. Its currency, the yuan or renminbi , was not recognized as a reference currency by the International Monetary Fund (IMF), contrary to the US dollar, to the British pound, to the Japanese yen and to the euro.
However, beyond the politics, the yuan’s inclusion in the SDR has little practical impact.
“This might create some volatility in financial markets in the near term,” said Paul Donovan of UBS. “But in the longer term this should be seen as a political ego-stroking exercise, rather than a significant change in reserve allocation.”
Seventy-one per cent of sovereign reserve money managers already had, or intended to acquire renminbi, according to a recent UBS survey. SDR membership will confer no obligation to hold the yuan on anyone, either.
What is the SDR basket?
IMF member countries can borrow money at favourable rates from the IMF’s reserves in any of the currencies listed in the SDR basket.
At present, these are the US dollar, the euro, Japan’s yen, and the British pound.
If China’s yuan is to also become a member, then its inclusion is likely to take around 10 months. It would be a fully fledged member from September 2016.
A thing that is now certain is that the Chinese currency is going to make part of IMF’S SDR called for ” special drawing rights “, and to become so an international reserve currency. For Beijing, it is all about a major political success, while doubts persist on therigour of the Chinese economy, supposed to have some positive impact on theworld’s growth.
The decision — which marks another step in China’s global economic emergence — came after the IMF evaluated the Asian nation’s standing as an exporter and the yuan’s role as a “freely usable” currency. In a statement, IMF Managing Director Christine Lagarde noted the yuan’s inclusion is a “clear representation of the reforms” taking place in China.
“The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy,” Lagarde said.
Lagarde and the United States had supported its inclusion in the basket, known as Special Drawing Rights (SDR). It will join the euro, yen, pound and dollar in the reserves basket. The yuan will have about an 11 percent weighting in the SDR.
The yuan is the fifth currency to comprise the SDR basket along with the U.S. dollar, the euro, the Japanese yen and the British pound. But the basket originally began with 16 currencies. It was then reduced to five in 1981, and to four in 1999 when the euro replaced the German mark and the French franc.
Not all currencies are weighed equally (yahoo.com)
With the yuan joining the club, the IMF had to develop a new weighting formula, which is based on factors like the value of the issuers’ exports and foreign exchange turnover. The yuan will officially become a member of the basket as of Oct. 1, 2016, and the currencies will be weighted as follows: U.S. dollar — 41.73%; euro — 30.93%; yuan — 10.92%; yen — 8.33%; pound — 8.09%.