China’s Yuan is approved by IMF for currency basket and why it matters.

In a recognition of China’s economic relevance, the International Monetary Fund has added the Chinese renminbi (people’s currency) or Yuan to the world’s basket of reserve currencies. In an announcement Christine Lagarde, IMF Managing Director recognised that Yuan’s admittance is indeed a “clear representation of reforms” taking place in the people’s republic of China. IMF broadcasted that their executive board agreed that starting October 1, 2016, Yuan will be freely accessible and join the U.S Dollar, the British Pound, the Japanese Yen and the Euro in the basket of currencies that also make up the special drawing right.

This development is a grand achievement of the Chinese government as they for years had been seeking entry into IMF’s exclusive rights basket so Yuan’s admission makes it a feasible currency option for emergency loans, it could widen its use among IMF countries. After the US, China is the second biggest economy and biggest trader. As per SWIFT, the organisation for interbank financial transfers, Yuan is at number four currency for global trade, accounting for about 2.5% of the total trade. After 2009, China was a signatory to currency swap agreements with the central banks of many countries like Canada, Britain, Brazil, South Korea, etc. Moreover Chinese state-owned bank branches in Russia, Germany, France, Britain, Australia, Switzerland and Singapore had the authorisation of taking deposits and settling trade related transactions in Yuan.

Though SDR doesn’t have any direct link financial markets or private businesses but gradually the IMF decision will prompt central banks to increase their Yuan reserve holdings, encouraging more use of Yan for investments and trade.

This IMF initiative may also encourage Chinese leaders to loosen up controls on Yuan.The ruling Party’s five-year plan states that Yuan will be “freely tradeable and useable” by 2020. The Yuan’s addition is like an affirmation as an international currency. This will further lead China to adopt better measures for speeding up the opening of its foreign exchange markets and capital markets.

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