The yuan, or renminbi, is the international reserve currency of China and has now joined the International Monetary Fund’s basket of reserve currencies as of Oct. 1, 2016. The (IMF) announced that the yuan meets the standard of being “freely usable” and will now be holding a status alongside the U.S. dollar, the euro, the British pound and the Japanese yen in a huge milestone for China.
This is the first time a new currency has been added to IMF’s Special Drawing Rights (SDR) basket since 1999, when the euro was launched.
The yuan was created right after World War II and for years could only be used domestically within China. Now, the yuan is projected to be used globally with the global economic system influenced mainly by the United States, Europe and Japan.
The implementation of the yuan took place on Oct. 1, 2016, having a 10.92 percent weighting in the basket. IMF says the official weighting will be 41.73 percent for the US dollar, 30.93 percent for the Euro, 8.33 percent for the Japanese yen, 8.09 percent for the British pound and 10.92 percent for the yuan, thus creating the yuan to have a higher weighting than both the Japanese yen and the British pound.
The IMF is estimating that the weight of the yuan could be up to 14 percent or 16 percent in the near future. These weightings could have an effect on the interest rates that other countries pay when they borrow money from the IMF and the money the Chinese currency receives.
The IMF’s decision was seen as a “win-win” situation for both China and the world which shows China’s achievements and economic development over the past couple decades. The U.S. supported the yuan to be added as a reserve currency. However, the approval is not very likely to have an effect on the demand for the yuan in a short-term perspective.
Angelina Marino, a first year, stated, “The yuan can have a great economic impact both for the good and bad. For China, the yuan can bring great economic growth; however, for the United States, it could lead to the devaluation of the dollar.”
China has made decisions to boost the chances of opening up a financial market over the past couple of years. China has opened the IMF’s onshore bond and currency markets to foreign central banks and has reported its reserves to the IMF.
A meeting held with a group of 20 economies is going to be held next year, and the projected outcome of the meeting is that China is going to have the upper hand on the IMF, holding their banks and onshore bonds and is going to attempt to persuade the IMF to implement border changes to the global monetary system in efforts to reach its potential of a “super-sovereign reserve currency.”