China’s Renminbi Is Approved as a Main World Currency

30 Nov 2015 | Author: | No comments yet »

China joins IMF currency basket: Why it matters.

BEIJING (AP) — The addition of China’s yuan to the select basket of currencies used as a yardstick by the International Monetary Fund is a sign, experts say, that the yuan may one day become as recognizable as the dollar or euro. The IMF’s executive board agreed to add the yuan, also known as the renminbi, to its Special Drawing Rights (SDR) basket alongside the dollar, euro, pound sterling and yen, in a move earlier backed by IMF chief Christine Lagarde and in-house experts. It reflects the rising importance of the world’s second-largest economy and is an endorsement of gradual Chinese moves toward making the currency freely traded. To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours. Christine Lagarde, head of the IMF, said on Monday that including the yuan in the basket was an important milestone in integrating China 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.

Currency traders and economists see the change as encouragement to Beijing to make faster progress on promises to make the yuan “freely tradable” and open its financial system. The currency will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR, which determines which currencies countries can receive as part of IMF loans. A vote by representatives of the IMF’s member countries to support the move marks a significant milestone for Beijing as it seeks to put the yuan on a par with the US dollar and play a growing role in global markets.

The yuan is the No. 4 currency for global trade, accounting for about 2.5 percent of the total, according to SWIFT, the organization for interbank financial transfers. Beijing controls the flow of money into and out of its economy but has encouraged the use of the yuan abroad, especially for trade, which helps Chinese exporters by eliminating the cost and risk of volatile exchange rates. Concluding this latest review, the IMF said: “The inclusion of the renminbi will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.” Branches of Chinese state-owned banks in Britain, Australia, Germany, Switzerland, Russia, France and Singapore have received authorization to take deposits or settle trade-related transactions in yuan. That might encourage more use of yuan for trade and investment. “Longer term, this is a huge step,” said Stephen Innes, chief trader for the currency firm OANDA in Singapore. “Once investors become more comfortable with Chinese markets, especially if they continue to progress with opening policies and make the same strides they did over the past year, international markets will really embrace Chinese capital markets.” Economists say the IMF decision could encourage Chinese leaders to further relax controls on the yuan.

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