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Chinese yuan set to join IMF’s elite currency basket

WASHINGTON: China’s yuan is poised to enter the International Monetary Fund’s elite SDR basket of currencies, elevating Beijing’s banknotes into a family long exclusive to global reserve assets.

A symbolic coup for policymakers in Beijing, the move represents a milestone in raising the economic profile and prestige of China, the world’s second-largest economy, and the success of a long-running effort by the People’s Bank of China.

The move will formally occur Saturday, with the yuan’s induction following a decision first announced in November last year, when the IMF found that China’s currency met the standard of being “freely usable.” The yuan now joins a club also comprising the US dollar, pound, yen and euro.

In an announcing the change, IMF Managing Director Christine Lagarde said Friday that the inclusion of the yuan, also known as the renminbi or “people’s currency,” showed China’s improved stewardship of its economy.

“The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange and financial systems and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets,” she said.

Halting liberalization

Beijing has moved haltingly in recent years to expand use of the yuan, which has doubled its share of global currency trading to an average daily turnover of $202 billion since 2013.

The yuan has moved into the top 10 but still trails the other major currencies, according to the Bank for International Settlements.

Created in the 1960s, the “Special Drawing Right” is a unit of account used by the International Monetary Fund as a foreign exchange reserve asset and is not a freely traded currency. To help manage financial crises, the Fund issues loans to member countries denominated in SDRs.

Some analysts were not ready to describe the yuan as a reserve currency simply because of its entry into the SDR basket.

“It’s not that significant in terms of actual initial impact, it’s more symbolic. Obviously for China,” said Mitul Kotech of Barclays, calling it “a step towards the currency becoming eventually a major reserve.”

Chinese authorities have progressively allowed the yuan to trade directly against other major currencies, adding the pound and euro in 2014. That year, Beijing asked for the yuan to be included the SDR basket.

In August of last year, China suddenly devalued the yuan, causing investors to dump the currency in volumes not seen since 1994 and sparking an outflow of capital from China. The yuan has fallen 8 percent against the US dollar over the last two years.

Yuan demand could rise

The SDR inclusion could push central banks and sovereign funds to diversify further by increasing their yuan holdings, according to Dariusz Kowalczyk of Credit Agricole.

“This is because there is a strong correlation between a currency’s weight in the basket and its share in global FX reserve allocation, and because of the attractiveness of China government bonds,” he said.

The yuan enters the SDR basket with a weight of 10.92 percent, versus 41.73 percent for the dollar and 8.33 percent for the yen.

However Julian Evans-Pritchard, a China specialist at Capital Economics, said the yuan’s inclusion was not likely to drive foreign demand for it.

“Contrary to what many seem to believe, this does not require that IMF members shift out of euro, yen and sterling assets into renminbi assets. Instead, it simply means that the renminbi exchange rate will begin to influence the value of SDRs,” he said.

“In practice, what determines whether central banks consider a currency a reserve asset is their confidence that they can sell that asset whenever needed into deep and liquid markets. Central banks are likely to come to their own judgement,” he added.

 

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