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IMF approved China's Yuan as Elite Reserve Currency

Dec 1, 2015 11:11 IST

International Monetary Fund (IMF) on 30 November 2015 included China's Yuan into its elite reserve currency basket. Yuan's entry into the basket takes effect from 1 October 2016.

Yuan also known as the Chinese Renminbi (RMB) was included in the basket after it met the existing criteria for its inclusion. The action was taken after the executive board at IMF completed the regular five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR).

What does the Inclusion mean?
• Yuan will be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the US Dollar, Euro, Japanese Yen and British Pound.
• Launching the new SDR basket on 1 October 2016 will provide sufficient lead time for the Fund, its members and other SDR users to adjust to these changes.
• The inclusion of the RMB will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.
• Inclusion of Yuan in the SDR is considered as a big political victory for China as Yuan’s desirability as a reserve currency for investors will increase and undermine the hegemony of the dollar as a global reserve currency.
• The decision an important milestone in the integration of the Chinese economy into the global financial system.
• It also recognises the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems.

What is a SDR?
The special drawing rights (SDR) system was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.

The SDR is instead an international reserve asset which the IMF uses to supplement its member countries’ reserves. The SDR’s value is based on the basket of the four international currencies and SDRs can be exchanged for “freely usable” currencies.

SDRs are allocated to IMF members from time to time. From October 2016, once the Yuan is added, the basket will have five currencies.

Further, SDR is not a claim on the IMF; rather it is a potential claim on the freely usable currencies of IMF members.

What are the Criteria to get added to SDR?
The SDR basket, upon which the SDR’s value is based, is typically reviewed every five years by the IMF’s executive board. It is reviewed to ensure that it reflects the relative importance of currencies in the global trading and financial systems.

The last time that happened was in 1999 when the newly created euro single currency was added, although technically it replaced the outgoing German deutschmark and French franc.

The main criterions to become eligible to be included in SDR are as follows:
Export Criterion: To become a part of the basket, exports of a particular country shall have the largest value over a five-year period. In other words, the concerned currency that is to be included in the basket are those issued by IMF members or currency unions that play a central role in the global economy.

Freely Usable Criterion: To join the basket, a currency must also be judged by the IMF’s executive board to be “a freely usable currency”. In other words, it must be a currency that is widely used to make payments for international transactions and widely traded in the main exchange markets.

Renminbi is the official name of the currency introduced by the Communist People's Republic of China at the time of its foundation in 1949. It means the people's currency.

On the other hand, word Yuan goes back further than Renminbi. It is the Chinese word for dollar - the silver coin, mostly minted in the Spanish empire, used by foreign merchants in China for some four centuries.

This is the piece of eight (real de a ocho) beloved of pirates and their parrots - worth eight reales and known as a peso in Spanish and a dollar in English.

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