Chinese Yuan Joins The World’s Elite Currencies

The Chinese yuan or renminbi has now joined the global elite of currencies after a historic vote by the International Monetary Fund (IMF).

The yuan becomes the fifth currency to have special drawing rights (SDR) accorded.

The Chinese currency now sits in a special place in world financial markets alongside the US dollar, Japanese yen, British Pound and the euro.

The vote was expected as the IMF had trailed the decision for months, but here we look at what this means to China and the rest of the world.

What are special drawing rights?

Special Drawing Rights are reserves of international currencies held by the IMF to top up the reserves of member countries undergoing economic difficulties. The SDR is not a currency but a Plan B for an economy in trouble.

What does this mean for the global economy?

Hopefully adding the might of the yuan to the SDR will give the IMF a greater spread of currencies and more opportunities to help countries in trouble.

Does this make the yuan more valuable?

Not really. This is a political rather than economic victory for China. The country now stands on the world stage alongside the USA, which the Chinese government thinks only befits the world’s second largest economy. The Chinese will want to push on from SDR to become a reserve currency like the US dollar.

Reserve currencies are considered valuable and reliable and are held in quantity as reserves by central banks.

What does the vote mean for the yuan?

The Chinese government will have to stop manipulating their currency as one of the stipulations about joining the SDR is member currencies have to have a floating exchange rate. This will mean less fiscal control over the yuan and currency management reforms by the People’s Republic Bank.

What makes the yuan a SDR?

The SDR currencies are those that were used the most for the exports of goods and services during the past five years. To join the SDR, the currency must have been widely used in international trade and on money markets.

The IMF explained that there is a difference between ‘freely used’ and free floating’ and China had to make changes to the way the currency was managed to move onto the SDR list, including devaluing the yuan earlier in the year.