IMF approves China’s yuan as elite reserve currency

The International Monetary Fund welcomed China’s yuan into its elite reserve currency basket on Monday, recognising the ascendance of the Asian power in the global economy.

China's-Yuan

 

The IMF welcomes China’s yuan into its elite reserve currency basket, recognising the ascendance of the Asian power in the global economy. (AFP/Fred Dufour)

WASHINGTON: The International Monetary Fund welcomed China’s yuan into its elite reserve currency basket on Monday (Nov 30), recognising the ascendance of the Asian power in the global economy.

The yuan, also known as the renminbi, will join the US dollar, euro, Japanese yen and British pound next year in the basket of currencies the IMF uses as an international reserve asset.

IMF Managing Director Christine Lagarde called the decision “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.”

The move by the IMF executive board, representing the institution’s 188 member nations, solidifies China’s ambition to see the yuan achieve global status as one of the world’s top currencies.

China, the world’s second-largest economy, asked last year for the yuan to be added to the Special Drawing Rights basket, but until recently it was considered too tightly controlled to qualify. The yuan already had met the IMF’s criteria for being widely used.

The board approval had been widely expected after IMF staff experts earlier in November said that Chinese authorities had taken the steps necessary for the yuan to be called “freely usable”, and Lagarde endorsed their recommendation.

Lagarde said the yuan’s inclusion in the basket was expected to help China open up further to the world economy. “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.

IMF members can use the Special Drawing Rights basket to obtain currencies to meet balance-of-payments needs. The Fund also issues its crisis loans – crucial to struggling economies like Greece – valued in SDRs. The yuan’s entry into the basket takes effect on Oct 1, 2016.

China’s central bank has taken steps to free up the movement of the yuan. The unexpected devaluation of the yuan last August received good marks from the IMF as it expanded the currency’s movements based on market forces.

In addition, Beijing last Wednesday announced that an initial group of foreign central banks has been allowed to enter the Chinese currency market, which likely will promote further internationalisation of the yuan in global trading.

Chinese challenges

But China is expected to face challenges with the yuan included as an IMF reserve currency. It puts the Bank of China under pressure to provide more transparency in line with its peers, such as the Federal Reserve and the European Central Bank.

Lagarde, speaking at a news conference, said the IMF had worked “very hard” in the last few months in the process of making the decision. She emphasised that it is a work in progress, and that the IMF will continue to monitor all criteria and compliance from all five authorities whose currencies are represented in the basket.

The composition and weightings of the SDRs basket are reviewed every five years. The last time the currencies in the basket were changed was in 2000, when the euro replaced the German deutschemark and the French franc.

The inclusion of the yuan in the IMF basket came with the support of the United States, the IMF’s largest shareholder.

Until recently Washington accused China of keeping the yuan artificially low to gain a trade advantage. But in October the US Treasury Department softened its tone, saying that after Beijing’s moves to loosen controls, the yuan “remains below its appropriate medium-term valuation.”

Still, the IMF decision risks angering some lawmakers in the US Congress amid fierce maneuvering for the 2016 presidential election.

Congress, for example, has repeatedly refused to ratify a 2010 IMF reform that would give greater weight to China and the four other emerging-market powers in the so-called BRICS: Brazil, Russia, India and South Africa.

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