IMF gives Chinese currency reserve asset status

WASHINGTON (Reuters) – The International Monetary Fund on Monday admitted the Chinese yuan to its benchmark currency basket, 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 basket of Special Drawing Rights (SDRs) alongside the dollar, euro, pound sterling and yen, is a milestone in the integration of China into global finances and a nod to the progress it has made with reforms.

To meet IMF criteria, Beijing has embarked on a series of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuances and extended yuan trading hours.

IMF chief Christine Lagarde, who along with internal experts previously supported inclusion, has made it clear that she does not expect Beijing to stop there.

“The inclusion of the renminbi in the SDR is a clear indication of the reforms that have been and will continue to be implemented,” she told reporters.

The People’s Bank of China said the move, backed by countries like the United States, Britain and Japan, showed the international community expected China to play a larger role in the Mondial economy.

“In the future, China will continue to deepen and accelerate economic reforms and financial openness, and will help promote global economic growth, preserve financial stability and improve global economic governance,” a- he said in a statement.

PBOC Vice Governor Yi Gang said he expected inclusion to make the yuan more stable and there was no basis for it to depreciate further, as some traders did. had planned it.

“BENCHMARK RECOGNITION”

An IMF official said it was not IMF policy to disclose the results of board votes, but someone familiar with IMF deliberations said the approval was unanimous.

The yuan CNH =CNY = will hold a 10.92% share, as expected, after a revision of the SDR weighting formula which also reduced the euro’s share by more than 6 percentage points.

An editorial by China’s state-run Xinhua News Agency said the move was “historic recognition” of China’s increased role in the global economy.

“The Chinese yuan clearly deserves a place in this group. China is the second largest economy in the world and the largest trader, and its currency is sufficiently liquid and stable to serve as a store of value, ”he added.

To be included in the SDR basket, the yuan had to meet the criteria of being “freely usable,” or widely used to make international payments and widely traded in foreign exchange markets, a criterion it lacked in the last review in. 2010.

The inclusion of the yuan from October 2016 is largely symbolic, with few immediate implications for financial markets. But this is the first time that an additional currency has been added to the SDR basket, which determines what currencies countries can receive as part of IMF loans.

“Ultimately, China would like to see, like a number of countries, the dollar end its reign as a global reserve currency,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors.

“That won’t happen until there is another currency which, from a geopolitical point of view, is as secure as the dollar.”

A woman takes photos of new 100 yuan banknotes that she withdrew from a bank in Hangzhou, Zhejiang province, China on November 12, 2015. REUTERS / Stringer

THE EURO MAKES THE CHAMBER

The new SDR formula gives more weight to financial variables and less to exports, reflecting long-standing criticisms of the methodology, but also reducing the euro’s share to 30.93 percent, from 37.4 percent.

The yuan will have a higher weight than the pound sterling and the yen, which will fall to 8.09% and 8.33% respectively, while the dollar will remain broadly unchanged at 41.73%.

The addition is likely to fuel demand for the Chinese currency and for renminbi-denominated assets, as central banks and foreign fund managers adjust their portfolios to reflect the yuan’s new status.

Moody’s Investors Service said it would boost investor confidence in yuan assets and expected more yuan-denominated bonds from non-Chinese issuers in China and an increase in Beijing’s quotas for investment channels. cross-border.

But analysts said investors would nonetheless remain cautious until China completely liberalized capital controls or let the currency float freely.

“Freely usable” meant freely usable by reserve managers and available to official institutions, “said Steven Englander, head of G10 currency strategy at Citi in New York.

“But if you look at the normal definition of liquidity, the point is not that you and your friends can use it, but the whole world can use it.”

The IMF said that China’s comparatively higher interest rates would likely raise the SDR interest rate, potentially increasing the cost of IMF lending 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 Alan Crosby and Will Waterman


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