China’s yuan clinches membership of the International Monetary Fund’s special drawing rights basket
In a much expected move, the International Monetary Fund (IMF) has included China's currency, the yuan or RMB, in its elite currency basket.
The yuan joins the yen, pound sterling, US dollar and euro in the IMF's special drawing rights – which acts as the IMF's own currency.
While the move has little immediate practical significance, it is expected to encourage Chinese officials to continue to liberalise their financial markets.
IMF boss Christine Lagarde said:
The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy 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. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.
"The prestige attached to being part of the SDR will encourage China to act as a good global citizen. It will make it harder to reverse existing reforms and will be a spur to further pro-market policy shifts," said Diana Choyleva, chief economist at Lombard Street Research.
"In particular, China can be expected to deepen its bond market and open its capital account wider to accommodate the desire of foreign central banks and institutional investors to hold more yuan assets."
Yet the path to a reformed financial sector is not expected to be a smooth one. Choyleva added:
The resulting inflows of capital are likely to be dwarfed initially by outflows as Chinese savers diversify their portfolios and seek havens for their cash in countries with well-developed property rights and the rule of law. The net outflows will have two consequences: domestic interest rates will rise and the yuan’s exchange rate will come under pressure.