The Yuan Joins the Basket

2016 is a historic year for the Chinese economy and global financial system as the Chinese yuan gets added to the International Monetary Fund’s Special Drawing Rights (SDR) reserve currency basket, joining the U.S. dollar, the euro, the yen, and the pound.

This is the most recent change since 2000 when the German mark and the French franc were replaced by the euro. This milestone in Chinese history is a reflection of Chinese authorities’ efforts in restructuring Chinese monetary and financial systems to meet all the criteria to join the basket this 2016.

The SDR are assets fashioned by the IMF and they could function like currencies. Transactions between central banks and the IMF use the SDR. The SDR basket undergoes review every five years by the IMF’s executive board to check the influence of the currencies in the global trading and financial systems. Consequently, different currencies can get added into the basket.

Qualification to join the basket is also evaluated by the IMF’s executive board. It will determine if a certain currency is freely usable. To be qualified, it must be able to pay for international transactions and it must be commonly traded in main exchange markets. Moreover, an “export criterion” must be satisfied. This criterion ensures that that the basket members’ currencies are not only free floating but also key players in the global economy.

With all the conditions given, the IMF finally released the verdict that Chinese yuan meets all of them. However, some market analysts are skeptic, thinking that the IMF may have bended the rules to add Chinese yuan in IMF’s SDR. Some people think that the yuan does not really meet the criteria, given the Chinese government’s forceful interference in the Chinese market, the devaluation of the yuan, and the prohibition of institutions to sell shares.

The recognition of yuan sends a strong statement of China’s dramatic climb to the top. Specialists predict that by 2030, the dollar and the euro will be joined by the yuan as the three leading currencies in the world. The Chinese yuan symbolizes how the global economy has evolved.

On the contrary, other experts say that the strengthening of the yuan is a significant turning point but China still needs to tackle the Chinese citizen’s lack of trust in their government to sustain its stability.