November 30, 2015 / 5:21 PM / 2 years ago

IMF gives China's currency prized reserve asset status

5 Min Read

A vendor holds Chinese Yuan notes at a market in Beijing, August 12, 2015.Jason Lee

WASHINGTON (Reuters) - The International Monetary Fund admitted China's yuan into its benchmark currency basket on Monday, as expected, 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 has previously backed 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 and Britain, 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.

A person familiar with the IMF deliberations said approval was unanimous. An IMF official said it was not IMF policy to disclose board voting records.

The yuan CNH= CNY= will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR which also cut the euro's share by more than 6 percentage points.

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 in the basket from October 2016 is a largely symbolic move 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.

But analysts said investors would likely 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.

Reporting by Krista Hughes; Additional reporting by Jason Lange and Howard Schneider in Washington and Dion Rabouin, Daniel Bases and Sam Forgione in New York; Editing by Meredith Mazzilli and Alan Crosby

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