What happens if Yuan becomes reserve currency
- At least $1 trillion of global reserves may migrate to yuan
- It would be a significant boost to President Xi's economic reform effort.
On November 14, the IMF’s decision to bestow reserve-currency status on China’s yuan, signifies a major economic milestone for the world’s No. 2 economy, which will likely accelerate global demand for its assets.
By adding the Chinese yuan to the SDR (Special Drawing Rights) basket of elite currencies, the global powers governing IMF is acknowledging the strength and international reach of China’s emerging world power.
In 1969, IMF created the SDR to boost global liquidity as the Bretton Woods system of fixed exchange rates unraveled. While the SDR is not 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. So the ability to convert SDRs into yuan on demand is crucial. Its value is currently based on weighted rates for the four currencies made up of the dollar, yen, euro and the pound.
IMF chief Christine Lagarde said that the yuan now meets the requirements for a freely usable currency. The yuan will be formally accepted into the IMF’s elite circle of "Special Drawing Rights" at the end of the month.
Until recently, it was believed that the yuan was controlled too tightly to be included on the list of world reserve currencies.
When China's Central Bank devalued its currency in August, world markets went into a tailspin, as investors took it as a sign of slowing economic growth in China. Yet, it was revealed that such reforms took the yuan closer to SDR.
"China believes that the inclusion of the yuan in the SDR basket will enhance the representativeness and will improve the existing international monetary system. The move will have win-win benefits for both China and the world," officials with the People's Bank of China said.
For China, the IMF’s inclusion of the yuan as a member of its lending reserves is also part of its strategy to elevate Beijing’s role in the international economy.
The international use of the yuan has been steadily broadening, with the amount of trade settled in yuan more than doubling over the last several years, to more than $1 trillion annually. China has set up dozens of yuan-denominated short-term credit lines called swaps with central banks around the globe totaling $3 trillion.
“China will modernize its financial system in the next five years,” said Pan Gongsheng, a central bank deputy governor.
Source: Wall Street Journal
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