A logo of yuan is seen at a foreign exchange store in Shanghai, China, December 1, 2015. Photo: Reuters/Aly Song
The International Monetary Fund admitted China's yuan into its benchmark currency basket on Monday, in a victory for Beijing's campaign for recognition as a global economic power.
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.
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 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.
"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