Odisha News Insight

China’s Yuan becomes Fifth IMF Reserve Currency

china's YuanBeijing, Dec 1: The IMF has decided to include the Chinese currency yuan in its Special Drawing Rights (SDR) basket that will make it the fifth reserve currency after the US dollar, Euro, British pound sterling and Japanese yen.

During a meeting in Washington on Monday on the regular five-yearly review of the SDR basket, the International Monetary Fund (IMF) executive board, that represents the fund’s 188 members, decided that the yuan “met all existing criteria”, Global Times daily reported.

Effective from October 1, 2016, the yuan will be included in the SDR basket. IMF managing director Christine Lagarde described the decision as “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,” she said.

The yuan will have a weightage of 10.92 percent in the new SDR basket, while respective weightings of other currencies in the basket shall be 41.73 percent for the US dollar, 30.93 percent for the euro, 8.33 percent for the Japanese yen and 8.09 percent for the British pound.

Created by the IMF in 1969, the SDR is an international reserve asset that can be exchanged among governments for freely usable currencies in times of need.

The yuan became the world’s No.2 currency for global trade finance in 2013, and overtook the yen to become the fourth most-used world payment currency in August, only after the US dollar, the euro and the sterling, according to the global transaction services organisation SWIFT.

To meet the IMF’s “freely usable” criteria, Chinese authorities undertook a series of reforms in recent months, such as improving its foreign exchange rate formation system, opening up its interbank bond and forex markets, and improving data transparency by subscribing to the IMF’s Special Data Dissemination Standard (SDDS).

China’s central bank, the People’s Bank of China (PBOC), on Tuesday welcomed the IMF’s decision, saying that the move shows the IMF’s recognition of China’s economic development and reform achievements. Offshore yuan strengthened sharply on Monday ahead of the decision, with the currency rising 0.4 percent against the US dollar during the trading, marking the biggest gain in a month.

In a muted reaction to the inclusion news, the central parity rate of the yuan weakened on Tuesday by 11 basis points to 6.39 against the US dollar, according to the China Foreign Exchange Trading System. China’s stocks closed mixed on Tuesday, with the benchmark Shanghai Composite Index up 0.32 percent to close at 3,456.31 points.

The ChiNext Index, which tracks China’s NASDAQ-style board of growth enterprises, dipped 0.64 percent to close at 2,655.35 points. (IANS)