IMF approves yuan as new reserve currency

The International Monetary Fund has admitted the yuan into its select basket of reserve currencies, giving a major boost to China’s position as a global economic power.

The yuan, also called the renminbi, now joins the dollar, euro, British pound and Japanese yen in the Special Drawing Rights (SDR) basket used as standard in dealings with the financial reserves of world countries.

IMF chief Christine Lagarde described the inclusion “an important milestone in the integration of the Chinese economy into the global financial system”.

China is the world’s second largest economy and the addition is a victory for its push to make the yuan a freely usable currency.

In 2009, Beijing unsuccessfully pressed for creation of a new reserve currency to cut reliance on dollars after the global financial crisis.

According to the SWIFT financial transactions system, the yuan is the No. 4 currency for global trade, accounting for about 2.5% of the total.

The Chinese government, however, still pegs its currency to the dollar. According to Derek Scissors of the American Enterprise Institute in Washington, until the yuan is allowed to trade freely, the IMF decision will “increase the dollar’s importance”.

“Those governments or investors hoping for a dilution of dollar dominance for portfolio diversification or political reasons are getting exactly the opposite,” he said.

The US Treasury Department said it supported the IMF’s inclusion of the yuan in the Special Drawing Rights basket.

Washington, however, is wary of China’s growing financial clout and the serious challenge which the dollar faces as more emerging economies are switching to their local currencies in trade.

On Saturday, Russia said it may issue 6 billion Chinese yuan ($938 million) worth of treasury bonds in 2016. TASS news agency also said Russia’s central bank had decided to include the yuan in its foreign exchange reserves.

IMF’s approval is set to anger lawmakers in the US Congress and presidential candidates amid fierce maneuvering for the 2016 presidential election.

US lawmakers have repeatedly refused to ratify a 2010 IMF reform to give greater weight to the BRICS group of emerging market powers, namely Brazil, Russia, India, China and South Africa.

The IMF created SDRs in the 1960s as a possible international currency. Until 1980, the basket was 16 currencies including Iran and South Africa but that was reduced.