IMF adds China’s yuan to elite reserve currency basket

The IMF  yesterday  added  the yuan to its elite basket of reserve currencies, a move designed to spur greater liberalisation in the world’s second largest economy. The decision will take effect next October and will confer international status on China’s currency as the government starts to ease restrictions on its rigidly controlled exchange-rate and financial system. On the downside, the move could  could add volatility to China’s trading performance  and may raise the risk of capital flight.
The IMF’s decision will eventually put the yuan alongside the dollar, euro, pound and yen in the fund’s reserve-currency basket, with the IMF giving more weight to China’s currency than to either the yen or pound. It is nevertheless being seen as more symbolic than anything else in the short term.

IMF MD Christine Lagarde

“This inclusion is clearly an important milestone in a journey…that will  certainly include  more reforms,” IMF Managing Director Christine Lagarde said after her board approved the yuan’s inclusion.
The decision  is seen as one of great significance in Beijjng which has  made the yuan’s inclusion  one of its highest priorities and has in recent months  been focussing on the expansion of the currency’s standing on a global stage, building trading hubs in Europe and developing a raft of renminbi-denominated bonds and commodity contracts. In devaluing the currency, China has also changed the way it sets the value of the renminbi each morning, allowing market forces to play a bigger role.

Source: wsj