The IMF announced on Monday that China’s currency the renminbi (RMB), or yuan, is now eligible to join the Special Drawing Rights (SDR) basket as an international reserve currency.
It joins an exclusive group of currencies that currently make up the IMF’s reserve basket: the U.S. dollar, the euro, the British pound and the Japanese yen.
“Today, November 30th, the IMF’s executive board decided that the renminbi qualified for the SDR (Special Drawing Rights) basket under existing criteria,” said IMF Managing Director Christine Lagarde in Monday’s official announcement.
“The addition and the inclusion of the renminbi in the SDR basket of currencies is a recognition of the significant reforms which have been conducted, of the significant opening up of the Chinese economy, of the financial, more market-driven principles that are being used by the Chinese authorities going forward. That is clearly symbolic in a way of all those reforms, which is why I associated the renminbi inclusion with the reforms conducted and to be continued.”
Lagarde described the decision as “an important milestone in the integration of the Chinese economy into the global financial system.”
The IMF designation has been one of China’s economic policy priorities for several years and the road to Monday’s decision has indeed been a long and often bumpy one in order to meet the necessary criteria.
In the last few months, China has stepped up its game to expand the currency’s global standing, building trading hubs in Europe and issuing renminbi-denominated bonds and commodity contracts.
The designation has been heralded by Chinese state media as a landmark and long overdue recognition of China’s increased role in the global economy as well as a sign of major progress in the evolution of the international financial system.
“The Chinese yuan clearly deserves a place in that grouping. China is the world’s second-biggest economy and top trader, and its currency is liquid and stable enough to serve as a store of value.” reported Xinhua News.
It has also been pointed out that the move can help safeguard global financial stability through China’s increased economic responsibility.
“It is a historic moment in international finance for an emerging market economy, with a per-capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world’s major reserve currencies,” said former head of the IMF’s China division, Eswar Prasad.
He went on to say, however, that “the most likely scenario is that the renminbi will erode but not seriously rival the dollar’s status as the dominant global reserve currency.” The dollar currently makes up about 64% of the total global reserve.
The milestone inclusion of the RMB will take effect on Oct. 1, 2016.
By Daniel Paul