HONG KONG -- The International Monetary Fund on Monday approved the Chinese yuan as one of the world's main central bank reserve currencies, an acknowledgment of the country's rising financial and economic heft.
The IMF decision will help lead to broader use of the yuan, also called the renminbi, in trade and finance, securing China's standing as a global economic power. But it also introduces new uncertainty into China's economy and financial system, as the country was forced to relax many currency controls to meet the IMF requirements.
The changes could inject volatility into the Chinese economy, since large flows of money surge into the country and recede based on its prospects. This could make it difficult for China to maintain its record of strong, steady growth, especially at a time when its economy is already slowing.
The IMF will start including the yuan in the fund's unit of accounting, the so-called special drawing rights, at the end of September. The yuan will take its place alongside the dollar, the euro, the yen and the pound.
Many central banks follow this benchmark in building their reserves, so countries could start holding more yuan as a result. China will also gain more influence in international bailouts denominated in the fund's accounting unit, like Greece's debt deal.
The decision to include the yuan "is an important milestone in the integration of the Chinese economy into the global financial system," Christine Lagarde, the managing director of the IMF, said in a statement. "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. 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."
China's leadership has made it a priority to join this group of currencies, naming it in October as one of its highest economic policy priorities in the coming years. The yuan's new status "will improve the international monetary system and safeguard global financial stability," President Xi Jinping of China said in mid-November.
In the months before the IMF decision, China took several actions to make sure that the yuan was more widely embraced. China did so partly to meet the IMF's rule that a currency must be "freely usable" before it can be included in its benchmark.
China and Britain have sold yuan-denominated sovereign bonds for the first time in London, which has emerged as Europe's hub for the currency. Even Hungary has announced plans to issue its own yuan-denominated bonds as well, and the Ceinex exchange in Frankfurt, Germany, has begun trading funds this month based on yuan bonds. Preparations began to trade yuan-denominated oil contracts in Shanghai, where copper and aluminum contracts are already sold.
Most important, China began changing the way it sets the value of the yuan each morning. In doing so, it abruptly devalued the currency.
The entry itself into the special drawing right is mainly symbolic. But broader moves toward greater financial transparency and easier trading -- part of the process to meet the IMF requirements -- will have long-term effects on the yuan's use.
"There's this obsession with the [special drawing rights], and it's completely out of proportion to its economic impact, which is likely to be trivial," said Randall Kroszner, a former Federal Reserve Board governor who is now an economics professor at the University of Chicago. "It may be that in the drive to get [special drawing rights], they may make changes that make the renminbi more attractive for international market participants."
Business on 12/01/2015