IMF approves China's yuan as elite reserve currency

Comments (0)

The International Monetary Fund has approved China's yuan into its elite reserve currency which is "an important milestone" for the world's second largest economy. The yuan's entry into the IMF list takes effect on October 1, 2016. With the decision, the yuan, also known as the renminbi, will join the US dollar, euro, Japanese yen and British pound next year in the list of currencies the IMF uses as an international reserve asset.

The inclusion of the yuan came with the support of the United States, the IMF's largest shareholder.The decision puts the Bank of China under pressure to provide more transparency in line with its peers, such as the Federal Reserve and the European Central Bank.

Background :-

China, the world's second-largest economy, asked last year for the yuan to be added to the Fund's Special Drawing Rights list but it failed to qualify the criteria required but later to meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours. The unexpected devaluation of the yuan last August received good marks from the IMF as it expanded the currency's movements based on market forces.

Special Drawing Rights (SDR) :-

  • Special drawing rights (XDR or SDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Their value is based on a basket of key international currencies reviewed by IMF every five years.
  • Based on the review conducted on December 30, 2010, the XDR basket consists of the following four currencies: U.S. dollars 41.9%, euro 37.4%, pounds sterling  11.3%, and Japanese yen 9.4% .
  • In the review conducted on November 30, 2015, the IMF decided that the Renminbi (Chinese Yuan  10.92%) will be added to the basket effective from December 1, 2015. IMF members can use the Special Drawing Rights (SDR) list to obtain currencies to meet balance-of-payments needs

Reserve currency

A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions and often considered a hard currency or safe-haven currency. People who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than people in other nations because they don't need to exchange their currency to do so.

By the end of the 20th century, the United States dollar was considered the world's most dominant reserve currency, and the world's need for dollars has allowed the United States government as well as Americans to borrow at lower costs, granting them an advantage in excess of $100 billion per year However, the U.S. dollar's status as a reserve currency, by increasing in value, hurts U.S. exporters


Practice Questions