The IMF will add the yuan to its basket of reserve currencies, an international stamp of approval of the strides China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan.

QuickTake The People’s Currency
The International Monetary Fund’s executive board, which represents the fund’s 188 member nations, decided the yuan meets the standard of being “freely usable” and will join the dollar, euro, pound and yen in its Special Drawing Rights basket, the organization said Monday in a statement. Approval was expected after IMF Managing Director Christine Lagarde announced Nov. 13 that her staff recommended inclusion, a position she supported.
It’s the first change in the SDR’s currency composition since 1999, when the euro replaced the deutsche mark and French franc. It’s also a milestone in a decades-long ascent toward international credibility for the yuan, which was created after World War II and for years could be used only domestically in the Communist-controlled nation. The IMF reviews the composition of the basket every five years and rejected the yuan during the last review, in 2010, saying it didn’t meet the necessary criteria.
“The renminbi’s inclusion in the SDR is a clear indication of the reforms that
have been implemented and will continue to be implemented and is a clear,
stronger representation of the global economy,” Lagarde said Monday during a press briefing at the IMF’s headquarters in Washington. Renminbi is the currency’s official name and means “the people’s currency” in Mandarin; yuan is the unit.

The Chinese Yuan’s Journey to Global Reserve Status: A Timeline
The addition will take effect Oct. 1, 2016, with the yuan having a 10.92 percent weighting in the basket, the IMF said. Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound. The dollar currently accounts for 41.9 percent of the basket, while the euro accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.
The yuan weakened in offshore trading Tuesday amid speculation China’s central bank will rein in intervention now that the IMF vote on reserve-currency status is out of the way. The long-term goal is for very few interventions, People’s Bank of China Deputy Governor Yi Gang said at a briefing, adding that bigger two-way fluctuations are normal.

In a preliminary report in July, IMF staff estimated the yuan would have a weight of about 14 percent to 16 percent. The weighting will affect the interest countries pay when they borrow from the IMF. It may also affect the scale of inflows the Chinese currency receives in the coming months.

Monetary System
The decision establishes the yuan as a fixture in the very international monetary system Chinese leaders criticized following the global financial crisis. In a landmark 2009 speech, PBOC Governor Zhou Xiaochuan argued a global system so reliant on a single currency -- the U.S. dollar -- was inherently prone to shocks. That conviction set off a global push by China’s leaders, including now-President Xi Jinping, to have the yuan included in the SDR, which countries can use to supplement their currency reserves.
The IMF staff recommendation was based on increasing international use and trading of the yuan, policy reforms that allow yuan to be used smoothly in SDR operations, and steps by China to step up data disclosure, the fund said. A more detailed staff report will be released later Monday or Tuesday, IMF officials said.
“It’s a big win for Beijing as they look to bolster their image and to get the respect they think they deserve,” said Timothy Adams, president of the Institute of International Finance and a former U.S. Treasury undersecretary.

QuickTake The Peoples' Currency
The IMF endorsement is a bright spot in what has been a tumultuous year for the world’s second-biggest economy, which has been buffeted by slowing growth, a tumbling stock market and a shift by authorities toward a more market-oriented exchange rate.
The IMF’s decision is a “win-win” for both China and the world and acknowledges China’s achievements in economic development and reform, the PBOC said in a statement on its website. The U.S. supported the fund’s staff recommendation to add the yuan, the Treasury Department said in an e-mailed statement without elaborating.
Approval is unlikely to have much impact on short-term demand for the yuan, given the SDR’s minor share of global reserves, according to economists at banks including HSBC Holdings Plc and ING Groep NV.
Adams said that rising demand may be “evolutionary” and “a process that will likely be pronounced.”
The decision should boost efforts by Xi to open up China’s financial markets. China implemented a series of reforms to win IMF support, such as opening its onshore bond and currency markets to foreign central banks and reporting its reserves to the IMF.

G-20 Host
The question is whether China, which will host meetings of the Group of 20 economies next year, will try to leverage the IMF’s support to pursue broader changes to the global monetary system. In his 2009 speech, Zhou suggested the IMF expand the use of the SDR to tap its potential as a "super-sovereign reserve currency."
The IMF’s move may also spur political blowback in the U.S., where Republican lawmakers have blocked efforts to expand the voting shares of China and other emerging-market economies at the fund. Senator Bob Casey, a Pennsylvania Democrat, said in an e-mailed statement that the decision “validates China’s history of cheating on its currency,” a history that’s hurt jobs and wages in his state.
The Washington-based fund created the SDR in 1969 to boost global liquidity. Under the Bretton Woods system of fixed exchange rates, countries pegged their currencies to the U.S. dollar. But for nations to increase their dollar reserves, the U.S. would have to run persistent current-account deficits, threatening the value of the greenback.
The SDR addressed this dilemma by serving as a supplementary reserve asset to augment countries’ gold and dollar holdings. While the SDR isn’t technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket to meet balance-of-payments needs.

http://www.bloomberg.com/news/articles/2015-11-30/imf-backs-yuan-in-reserve-currency-club-after-rejection-in-2010

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