At present, the basket of currencies that make up the IMF’s Special Drawing Right include the dollar, euro, yen, and pound sterling.
The Executive Board of the International Monetary Fund on Monday decided to include the Chinese currency, the renminbi (yuan), into its basket of currencies that make up the IMF’s Special Drawing Right (SDR). The decision was taken during the IMF’s five-yearly review of the basket of currencies.
“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. 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,” Christine Lagarde, Managing Director of the IMF, said following the review meeting.
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, Ms. Lagarde added.
The SDR, created by the IMF in 1969, functions like an international reserve, allowing member countries to draw upon any of the reserve currencies in the basket. At present, these include the dollar, euro, yen, and pound sterling. Following the IMF’s decision, this basket will also include the renminbi from October 1, 2016 onwards.
Earlier this month, Chief Economic Advisor Arvind Subramanian had told The Hindu that the renminbi’s inclusion in the SDR basket, while great news for China, would also be good for India. The specifications of becoming a reserve currency mean that China’s ability to manipulate the renminbi will now be limited. India has so far had to deal with China’s over-capacity as well as its devalued currency.
The renmimbi becoming a reserve currency will at least lessen the latter problem, Mr. Subramanian had said at the time.
The inclusion of the renminbi in this basket has been backed by most of the major economies, including Germany, Britain, France and Italy. While the US was historically cautious about the idea, President Obama in September had said that the US would support China’s case for inclusion in the SDR basket if it met the IMF’s technical specifications.
Earlier this month, the IMF’s staff and Ms. Lagarde both recommended that the renminbi be included in the SDR basket, and the Board’s decision on Monday confirms this.