Written by Doaa Hussein
The Chinese yuan is to be considered from now on a spearheading player in the international economic league, after being bestowed by the IMF (International Monetary Fund) to be the fifth reserve currency in its elite basket last week.
The five yearly review of the IMF basket of currencies conducted by Managing Director Christine Lagarde, resulted in giving the yuan, also known as the renminbi, the approval stamp to join its reserve currency basket, alongside with the US dollar, the British pound, the Japanese yen, and the euro. The last change made to the basket was in 2000, when the euro replaced the German mark and the franc.
By this approval, the yuan is granted also to be in the SDR – Special Drawing Right – which is a supplementary reserve asset, created by the IMF to decide on the currency mix that will be given to countries as financial aid.
Analysts say that this decision is much of a symbolic act, proving that China, transformed from poverty to a great economic power, is now one of the world’s leaders on the trade map.
China’s efforts:
China has been clinging to this position since last year, conducting notable economic reforms, which were rewarded by the IMF after making sure of the free usability and vast availability of the yuan – two basic criteria to become a reserve currency.
After the announcement, allegations were largely sparked about the political nature of this decision, saying that the IMF is bowing to pressure by China.
Those allegations were renounced by spokesman Gerry Rice saying the decision was based solely on “technical” considerations.
Implications on china:
The yuan’s “inclusion is unlikely to have great impact on short-term demand” for the currency, said IG market strategist Bernard Aw in a report, according to CNBC. He added that what is more important is the boost given to the Chinese government to go on with greater liberalisation to the Chinese financial market. It is noteworthy that the actual implementation of the new IMF currency basket is to be in October 2016.
Analysts at the Japanese bank, Nomura foresaw that the yuan will be one of the top three major international currencies – a peer to the US dollar and the euro – by 2030. They estimate the yuan will make up 10 per cent of the IMF’s SDR basket, according to The Guardian.
China, the second largest economy, is now being watched for furnishing new plans to prove its merit of the IMF confidence.
