China's yuan joins the International Monetary Fund's basket of reserve currencies on Saturday in a milestone for the government's campaign for recognition as a global economic power.
It is the first time that a currency has been added to sit alongside the U.S. dollar, the euro, the yen and the British pound in the IMF's special drawing rights (SDR) basket, which determines the currencies countries receive as part of IMF loans.
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| Photo by Reuters/Jason Lee |
The IMF is adding the yuan, also known as the renminbi, or "people's money", on the same day that the Communist Party celebrates the founding of the People's Republic of China in 1949.
The IMF announced last year that it would add the yuan to the basket, so actual inclusion is not expected to impact financial markets. But it puts Beijing's often opaque economic and foreign exchange policy in the international spotlight as central banks add yuan assets to their official reserves.
Critics argue that the yuan does not fully meet IMF reserve currency criteria of being freely usable, or widely used to settle trade or widely traded in financial markets. U.S. Republican presidential nominee Donald Trump has said he will formally label China a currency manipulator if he wins November's election.
China stunned investors by devaluing the currency last year and the yuan has since weakened to near six-year lows, adding to worries about already feeble global growth.
Some China watchers also fear that Beijing's commitment to further market opening and financial sector reforms will fade after its diplomatic success, despite repeated reassurances from Beijing it will continue with the process.
U.S. Treasury Secretary Jack Lew said on Thursday the yuan was "quite a ways" from true global reserve currency status. While recognizing "enormous" change in China in the last 10 years that had made the currency more open, Lew said the government still had work to do.
"Being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency," he said.
Capital Economics said inclusion of the currency in the IMF's SDR basket will have minimal impact on foreign demand for yuan assets, so "offers little support" for the currency.
"If anything, the risk is that official intervention to keep the renminbi stable ahead of its inclusion will subsequently be paired back, allowing for renewed deprecation," it said in a research note.
