Chinese yuan to be admitted to IMF reserve currency basket
Move a political win for China, but could force it to make financial system more transparent
The International Monetary Fund announced Monday that China's currency, the yuan, will join the fund's group of international basket of reserve currencies.
IMF staff backed inclusion of the yuan in a report this fall and earlier in the month, IMF head Christine Lagarde spoke in favour of its inclusion.
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Currently the basket of reserve currencies includes the U.S. dollar, the euro, the Japanese yen and the British pound.
China has been keen to build its financial clout worldwide by having its currency, also called the renminbi (people's money), included in the select group.
After its meeting in Washington, D.C., the IMF said the yuan met the criteria to be included in the basket.
Big political victory
It has lobbied hard to be included since last year and the win amounts to a big political victory.
"More than anything, it is a symbolic and political milestone in China's long path to renminbi internationalization," RBC Capital Markets said in a note to clients.
China is the world's second largest economy behind the U.S. and has been making its currency more easily convertible at yuan trading hubs in London and in Canada.
It wants more investors to denominate business and other investments in yuan, in part to reduce the dominance of the U.S. dollar, an ambition set back this summer by China's devaluation of the currency.
Lagarde said the inclusion was "clearly an important milestone in a journey that had begun months, if not years ago to a "market-driven" economy in China. The decision was based off the volume of exports involving the yuan and its use in the financial markets.
Inclusion in the IMF basket could force China to loosen its grip on management of the currency, historically pegged to the U.S. dollar. It also could lead to demands for further reforms to make it more freely tradable..
The change would take effect in October 2016. The last change to the IMF basket was in 1999, when the newly created euro replaced the German mark.