China’s yuan joins elite club of IMF reserve currencies

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon/File PhotoChinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon/File Photo

China’s yuan joins the International Monetary Fund’s basket of reserve currencies in a milestone for the government’s campaign for recognition as a global economic power.

The yuan joins the U.S. dollar, the euro, the yen and British pound in the IMF’s special drawing rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans. It marks the first time a new currency has been added since the euro was launched in 1999.The IMF is adding the yuan, also known as the renminbi, or “people’s money”, on the same day that the Communist Party celebrates the founding of the People’s Republic of China in 1949.

According to the People’s Bank of China:

“The inclusion into the SDR is a milestone in the internationalization of the renminbi, and is an affirmation of the success of China’s economic development and results of the reform and opening up of the financial sector.”

The IMF announced last year that it would add the yuan to the basket, so actual inclusion is not expected to impact financial markets. But it puts Beijing’s often opaque economic and foreign exchange policy in the international spotlight as some central banks add yuan assets to their official reserves.

Critics argue that the move is largely symbolic and the yuan does not fully meet IMF reserve currency criteria of being freely usable, or widely used to settle trade or widely traded in financial markets. U.S. Republican presidential nominee Donald Trump has said he will formally label China a currency manipulator if he wins November’s election.

 

U.S. Treasury Secretary Jack Lew said on Thursday the yuan was “quite a ways” from true global reserve currency status. The new IMF status recognizes the “enormous” change in China in the last 10 years that had made the yuan more open, but Beijing still had work to do to make its currency and its economy more market-driven, he said. “Being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency,” he said.

Capital Economics said inclusion of the currency in the IMF’s SDR basket will have minimal impact on foreign demand for yuan assets, so “offers little support” for the currency.

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