China Gets Its Reserve Currency Status

100 yuan notes

THE INTERNATIONAL MONETARY Fund’s executive board has, as expected, approved the inclusion of the yuan in the basket of currencies that constitute its Special Drawing Rights. Thus, China joins the dollar, euro, yen and pound sterling in the elite club of reserve currencies, as Beijing has long been so desirous of doing.

The yuan’s weight in the basket will be 10.9%, slightly less than had been expected but still sufficient to rank it ahead of the yen (8.3%) and sterling (8.1%), if a ways behind the dollar (41.7%) and the euro (31%).  The dollar’s weighting will remain unchanged: the yuan’s allocation has all been taken from the three other currencies. The new status takes effect from October 1, 2016.

The decision is largely symbolic at this point in the yuan’s international usage, but marks a milestone in the currency’s internationalization — and more significantly its full convertibility. ‘Freely usable’ is an IMF criterion for a currency’s inclusion in its basket.

As we have noted before, the contingent opening of the capital account is also an important policy priority for rebalancing the economy. The IMF’s accolade will be a boost for those in China who have been promoting that, and especially now as other economic-rebalancing reforms are flagging in the face of slowing growth and political opposition.

Christine Lagarde, the IMF’s managing director, said the decision was:

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.

As she could have been expected to say. However, the IMF’s announcement also included this kicker:

Authorities of all currencies represented in the SDR basket, which now includes the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the IMF, its membership and other SDR users in their currencies.

i.e., no backsliding of financial reform whatever the domestic temptations.

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One response to “China Gets Its Reserve Currency Status

  1. Pingback: The Renminbi Ups Its Status | China Bystander

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