Investing.com -- The International Monetary Fund, as expected, approved reserve-currency status for China's yuan on Monday by adding the Renminbi to its Special Drawing Rights basket of currencies.
While completing its regular five-year review of the basket of currencies that comprise the Special Drawing Rights (SDR), the IMF's executive board determined that the Renminbi (RMB) is a freely usable currency, which met all of its existing criteria for inclusion in the reserve basket. The move will be effective on October 1, 2016, to provide sufficient lead time for the IMF and allow its members enough time to adapt to the changes, the fund said in a statement.
“The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system," IMF managing director Christine Lagarde said in a statement. "It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
The SDR gives IMF member countries the right to obtain any of the currencies in the basket to meet balance of payments needs, rebalance their reserves and settle the debts they owe to the fund. Currently, the basket is composed of four currencies -- the Dollar, euro, British pound and Japanese yen. By next October, the yuan will represent approximately 11% of the reserve basket, above both the pound and yen, which will each make up about 8%. In addition, the Dollar will remain as the predominant SDR currency, representing about 41% of the basket, while the euro will make up the final 30%.
There is approximately $280 billion in SDRs created and allocated to members of the IMF, according to the fund. Although an SDR is not viewed as an official currency, IMF members can exchange them for currencies that make up the basket through deals with other SDR holders.
In U.S. afternoon trading, USD/CNY inched up 0.0040 or 0.06% to 6.3984.