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Yuan

IMF decision to include yuan in its basket of reserve currencies will help accelerate economic reforms in China

PUBLISHED : Monday, 23 November, 2015, 2:04am
UPDATED : Monday, 23 November, 2015, 2:04am

The inclusion of the Chinese currency in the International Monetary Fund's special drawing rights (SDR) basket is long awaited, long overdue and, finally, all but a foregone conclusion. Before the end of the month, the IMF's governing board is expected to adopt the recommendation of staff advisers that the yuan be added to the existing four units of the basket - the US dollar, euro, yen and sterling - boosting its rise to the status of a global reserve currency. The experts reported that the yuan met the requirements as a "freely usable" currency.

The yuan did not have to be included in the basket to be widely recognised as a store of value, the Swiss franc being one example. But, addressing the recent meeting of leaders of G20 nations, President Xi Jinping rightly welcomed consensus that inclusion would increase the representation and attraction of the SDR, improve the international monetary system and safeguard global financial stability.

The Chinese economy is, after all, a major driver of global growth. That said, the global dividends of the yuan's ascent will ultimately depend on Beijing pushing ahead with liberalisation of its markets and capital flows to make it widely available for use as a reserve asset. Xi implicitly acknowledged this, saying that China's confidence in its ability to sustain a medium-to-high growth rate came from its determination and actions to deepen reform and build an open economic system.

However, he admitted that "this endeavour won't be smooth sailing. It won't happen overnight". In that respect, the IMF decision sends a positive message for the internal debate about accelerated reform.

Meanwhile, Xi predicted 7 per cent growth overall this year, following a dip to 6.9 per cent in the third quarter, meaning China will contribute about a third of global growth. This may be down from 50 per cent in the past, but is still critical when other major economies have slowed. China's 13th five-year plan aims to double 2010 GDP by 2020. This calls for 6.5 per cent annualised growth, underpinning future global growth.