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 The decision to add the yuan, also known as the renminbi, to the
Special Drawing Rights (SDR) basket alongside the dollar, euro,
pound sterling and yen, is an important milestone in China's
integration into global finances and a nod to the progress it has
made with reforms.
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.
IMF chief Christine Lagarde, who along with in-house experts had
previously given her support for the inclusion, made it clear she
did not expect Beijing to stop there.
"The renminbi's inclusion in the SDR is a clear indication of the
reforms that have been implemented and will continue to be
implemented," she told reporters.
The People's Bank of China said the move, which was backed by
countries including the United States, Britain and Japan, showed the
international community expected China to play a bigger role in the
world economy.
"Going forward, China will continue to deepen and accelerate
economic reforms and financial opening up, and contribute to
promoting world economic growth, safeguarding financial stability
and improving global economic governance," it said in a statement.
The PBOC's vice governor Yi Gang said he expected the inclusion
would make the yuan more stable and there was no basis for it to
devalue further, as some traders had expected.
"LANDMARK RECOGNITION"
An IMF official said it was not IMF policy to disclose board voting
records, but a person familiar with the IMF deliberations said
approval had been unanimous.
The yuan <CNH=> <CNY=> will have a 10.92 percent share, in line with
expectations, after a review of the weightings formula for the SDR
that also cut the euro's share by more than 6 percentage points.
An editorial in China's official Xinhua news agency said the
decision was a "landmark recognition" of China's increased role in
the global economy.
"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,"
it added.
To be included in the SDR basket, the yuan had to meet the criteria
to be "freely usable", or widely used to make international payments
and widely traded in foreign exchange markets, a yardstick it missed
at the last review in 2010.
The yuan's inclusion from October 2016 is largely symbolic, with few
immediate implications for financial markets. But it is the first
time an additional currency has been added to the SDR basket, which
determines which currencies countries can receive as part of IMF
loans.
"Ultimately China would like to see, as a number of countries would,
the dollar end its reign as the global reserve currency," said
Malcolm Polley, chief investment officer at Stewart Capital
Advisors.
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"That won’t happen until there is another currency that from a
geopolitical standpoint is as secure as the dollar."
EURO MAKES ROOM
The new SDR formula gives more weight to financial variables and
less to exports, reflecting long-standing criticism of the
methodology but also cutting the euro's share to 30.93 percent, from
37.4 percent.
The yuan will come in with a higher weight than sterling and yen,
which will drop to 8.09 percent and 8.33 percent respectively, while
the dollar remains broadly unchanged at 41.73 percent.
The addition is likely to fuel demand for China's currency and for
renminbi-denominated assets as central banks and foreign fund
managers adjust their portfolios to reflect the yuan's new status.
Moody's Investors Service said it would give a confidence boost for
investors in yuan assets and it expected more yuan-denominated bonds
from non-Chinese issuers in China, and an increase in Beijing's
quotas for cross-border investment channels.
But analysts said investors would nevertheless remain cautious as
long as China did not fully liberalize capital controls or allow the
currency to float freely.
"'Freely usable' meant freely usable to reserve managers and
available to official institutions," said Steven Englander, head of
G10 foreign exchange strategy at Citi in New York.
"But if you look at the normal definition of liquidity, the point is
not that just you and your mates can use it but that the whole world
can use it."
The IMF said China's comparatively higher interest rates would
likely increase the SDR interest rate, potentially pushing up the
cost of IMF loans for some borrowers.
(Reporting by Krista Hughes; Additional reporting by Jason Lange and
Howard Schneider in Washington and Dion Rabouin, Daniel Bases and
Sam Forgione in New York; Editing by Alan Crosby and Will Waterman)
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