International Monetary Fund’s decision to include the yuan in its basket of reserve currencies will boost economic reforms in China

Historic move is latest step towards long-term goal of liberalising markets and capital flows

PUBLISHED : Wednesday, 02 December, 2015, 10:24pm
UPDATED : Wednesday, 02 December, 2015, 10:24pm

China has finally won the endorsement of the International Monetary Fund for its efforts to reform its economy and internationalise its currency, with inclusion of the yuan in the basket of currencies that underpin Special Drawing Rights for deserving nations. In an historic moment for the international financial system and a new world order, a still-emerging market economy is joining four developed nations – the US, Europe, Japan and the UK – as an issuer of one of the world’s major reserve currencies. Indeed, as a mark of China’s global economic clout, the yuan has been given the third biggest weighting in the SDR, still well behind the US dollar and the euro but ahead of the yen and the pound.

IMF managing director Christine Lagarde has rightly hailed the decision by the fund’s governing board as a milestone in the mainland’s integration into the global financial system.

While largely symbolic, inclusion in the SDR will strengthen the hand of China’s reformers in pressing on with liberalisation of markets and capital flows. This would make the yuan widely available as a reserve asset, and give Chinese savers access to global markets, paving the way for full convertibility sooner rather than later. It is welcome news to central banks and others holding large and increasing yuan deposits.

Internationalisation of the currency can be expected to accelerate, with a widening of the trading band around the US dollar and more transparency, which will permit market forces to increasingly influence the exchange rate. In that respect, many international analysts say that while the decision marks an important moment in China’s ambitions for its currency, it remains mostly symbolic and will not reverse the yuan’s falling trend against the US dollar. The People’s Bank of China has been quick to calm any fears of volatility. Deputy Governor Yi Gang says that while the long-term goal remains a free float, it will maintain the current managed float exchange regime with intervention from time to time to stabilise the market.