The International Monetary Fund (IMF) has announced that it will be adding the Chinese yuan to its reserve currencies. The decision shows that China has taken major strides in incorporating itself into an economic system that has been dominated by the United States, Europe and Japan for decades.
The executive board of the IMF has determined that the yuan is in line with the standard of being “freely usable” across the globe. The yuan will join the dollar, euro, pound and yen in the Special Drawing Rights (SDR) basket of the IMF. The yuan will actually carry more weight in the SDR basket than both the yen and the pound.
The inclusion of the yuan represents the first change in the currency composition of the SDR basket since 1999 when the euro was included. The move demonstrates international credibility for the yuan, which historically could only be used in China.
Every five years, the IMF reviews the currency composition of the SDR basket. At the last review in 2010, the IMF rejected the yuan, saying that it was not in line with the necessary criteria.
IMF Managing Director Christine Lagarde said, “The decision is 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 yuan will not be included in the SDR basket until the start of October next year. At that time, the dollar will have a 41.73% weighing, the euro will have a 30.93% weighing, the yuan will have a 10.92% weighing, the yen will have a 8.33% weighing and the pound will have a 8.09% weighing. These weights will affect the amount of interest that countries will be required to pay when they borrow money from the IMF.
The endorsement by the IMF represents a rare bright spot in what has been a tough year for the Chinese economy. China has experienced a major economic slowdown in 2015. This slowdown has largely been caused by increases in the prices of key commodities that are critical for Chinese expansion.