The People’s Republic of China’s national currency, the Yuan, has become the newest member of the International Monetary Fund’s (IMF’s) basket of reserve currencies.

 

The IMF announced that the move to include China’s currency in its reserves became effective on October 1 and was in recognition and reinforcement of “China’s continuing reform progress.”

 

IMF Director Siddharth Tiwari said in a statement that the decision  to add Yuan to reserves “is an important milestone in the integration of the Chinese economy into the global financial system,” adding that China’s “expanding role in global trade” made the move possible.

 

Experts say the IMF’s move is likely to displace demand for other currencies in the IMF’s reserve currency basket, known as the Special Drawing Rights (SDR). Those other currencies include the U.S. dollar, the euro, the Japanese yen and the British pound.

The inclusion of the Chinese renminbi according to them will displace the weight of the other currencies.

 

The yuan joins the U.S. dollar, the euro, the yen and British pound in the IMF’s special drawing rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans. It marks the first time a new currency has been added since the euro was launched in 1999.The IMF is adding the yuan, also known as the renminbi, or “people’s money”, on the same day that the Communist Party celebrates the founding of the People’s Republic of China in 1949.

 

The U.S. dollar will now be 41.7percent of the basket (versus 41.9% previously) while the euro will fall from 37.4 percent to 30.9 percent; the yen will fall from 9.4 percent to 8.3 percent, and the pound will fall from 11.3 percent to 8.1 percent.

 

The People’s Bank of China heralded the move as a “milestone” in the country’s financial progress and said it is “an affirmation of the success of China’s economic development and results of the reform and opening up of the financial sector.”

 

Some analysts have argued that China’s relaxed banking regulations have created the largest debt bubble in the world and will result in greater economic instability in China and globally. It remains to be seen how the IMF’s move will offset that instability.

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