Yuan becomes IMF reserve currency | Business| Economy and finance news from a German perspective | DW | 30.11.2015
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Yuan becomes IMF reserve currency

China's currency has received a major status upgrade after the IMF agreed to include it in an elite basket of currencies. The decision marks a coming of age for the world's second-biggest economy.

Officially it's called the renminbi, commonly the yuan. Or to be more precise - renminbi is the currency, yuan is the basic unit of the currency, similar to the terms used for the UK currency, sterling and pound. After Monday, China's currency can be called one of the most important in the world.

The International Monetary Fund (IMF) on Monday voted to include the yuan in its basket of world currencies, a longstanding goal of Beijing's as it seeks to elevate the position of its own legal tender against the US dollar, euro, sterling and yen. The change will take effect next October.

China's economy, second to only the United States in terms of its size, has long enjoyed elite status, but Chinese money has had no such luck.

Until recently, the International Monetary Fund (IMF) considered the yuan too tightly controlled by Beijing to treat it the same as other major currencies.

A mark of honor

The soon-to-be five currencies belong to the IMF's so-called "special drawing rights" (SDR), the average value of which the crisis lender uses as a benchmark for some of its most important calculations.

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Yuan to become reserve currency

To that end, the SDR is an artificial currency of sorts, although it has no physical representation. It is a tool used by the IMF, and it can be exchanged for "real" currencies.

When the IMF issues emergency loans to economies in need, for instance, as was recently the case in Greece, it does so in SDRs.

It also sets limits on how much of a particular reserve currency each of its 188 member states can call on based on the daily average of the market exchange rates of the currencies.

Inclusion in the basket is thus a mark of honor, one that Beijing has been seeking for years.

"China has lobbied extremely hard to get the yuan added to the elite basket of reserve currencies," said Kamel Mellahi, a professor at Warwick Business School in the UK. "This is not only a symbolic achievement but could in the long term challenge the dominance of the US dollar as the global reserve currency of choice."

Growing popularity

In order to be included in the IMF's prestigious basket, China had to show that the yuan was widely used for international transactions and trades on foreign exchange markets. In fact, it is now the third most-traded currency in the world.

This is a result of Beijing's policy to persuade other countries to do business in yuan, something it achieved by forging currency swap deals with nearly 40 other countries and pursuing various trade deals across Asia.

Yuan-denominated financial instruments are also gaining in popularity among international investors. A recent example of the currency's growing stature came this November when a new German-Chinese financial market was opened in Frankfurt. On offer were 200 products, all available in yuan.

Big promises

But for all its ubiquity, Beijing was still barred access to the inner circle of global currencies as long as it kept the yuan's value artificially low in order to bolster the country's exporters. Chinese policymakers have slowly been relinquishing that control, but some critics, notably in the US, doubt their sincerity and say reforms have been too incremental.

A couple of months ago, after the People's Bank of China cut the yuan's value in response to the Shanghai stock exchange's dramatic 40 percent plummet in August, it promised to refrain from any "competitive devaluations."

It also promised to "resist all forms of protectionism." Those pledges came as growth in China, the rapidity of which was once taken for granted, has begun to cool to more normal rates.

The IMF, for one, forecasts China's economy will grow by 6.3 percent in 2016, down from rates as high as 14 percent in the mid-2000s and mid-90s.

cjc/ng (dpa, AFP, Reuters)

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