A Milestone In Internationalizing the RMB

The International Monetary Fund （IMF） agreed on November 30 to add the Chinese currency， the yuan， to its Special Drawing Rights （SDRs） basket， which currently consists of the U.S. dollar， Japanese yen， pound sterling and euro.

The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries official reserves. The yuan， also called the renminbi （RMB）， will have a 10.92-percent weighting in the basket， behind the U.S. dollar and the euro， when the addition goes into effect on October 1， 2016.

The IMF selects currencies to include in the SDR basket based on two criteria： the size of a countrys exports and if its currency is freely usable， meaning it serves as a main currency for payments in international transactions.

Not only is China a large exporter， its currency has also become increasingly internationalized and freely usable over the past few years. The IMF Executive Board recently decided the RMB “met all existing criteria.”

The yuans inclusion benefits China and the rest of the world. Emerging economies， which are the new engines of global growth， are currently underrepresented in the SDR basket. Calls to add emerging markets currencies have grown louder since the 2008 global financial crisis. Including the RMB as the only currency from a developing country increases the SDRs representativeness.

This is in addition to the fact that the yuan is the legal tender in the worlds second largest economy. Its use in international trade has rapidly increased in recent years， which further supports the rationale behind the IMFs decision. It is also recognition of the progress the Chinese Government has made in reforming Chinas monetary and financial systems.

The IMFs decision provides countries with an additional reserve currency option and brings the RMB one step closer to becoming an international reserve currency. The Peoples Bank of China （PBOC）—the countrys central bank—has recently continued to relax its rules for overseas financial institutions entering the yuan-denominated bond market， which indicates the bank is preparing to expedite the internationalization of the currency. The yuans inclusion in the SDR basket will help further open Chinas financial system and integrate the Chinese economy into global financial markets.

Ultimately， the decision shows the international community expects China to play a bigger role in the international economic and financial system， the PBOC said in a statement following the IMFs announcement. China will continue to step up its financial reform with the goals of contributing to global growth， financial stability and economic governance.