The International Monetary Fund (IMF) on Monday gave a vote of confidence to the Chinese Yuan by including it in the Special Drawing Rights (SDR) uniting the US Dollar, Euro, British Pound and the Japanese Yen.
Adding the yuan as a reserve currency will allow central banks to buy more of the Chinese currency, and boost investment in the Chinese stock market. According to Standard Chartered bank, within five years market players will invest at least $1 trillion in Chinese assets.
Christine Lagarde, head of the IMF, said on Monday that including the yuan in the basket was an important milestone in integrating China 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. 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,” she said.
The historic decision will come after years of negotiations between Beijing and the IMF. The main obstacle was China’s monetary policy of keeping the yuan artificially low to boost domestic exports.
The list of currencies in the basket hasn’t been updated by the IMF since 2000, when the euro superseded the franc and deutschmark.
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”. The weightings are adjusted over time and new currencies can be added at those reviews. This decision means the yuan will the basket in October next year.
Concluding this latest review, the IMF said: “The inclusion of the renminbi will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.”