International Monetary Fund (IMF) added China’s yuan to its group of key global currencies this week, a historic development that gives new status to the world’s second-largest economy.
It is “a sign that China is rising ever faster and further on the global economic stage,” reported the BBC. China now accounts for more than 15 percent of the global gross economic output, nearly three times what it was a decade ago, said the Wall Street Journal.
The IMF said the yuan, also called the renminbi, will be added to the group of reserve currencies. Those include the U.S. dollar, Europe’s euro, the Japanese yen and the British pound. These currencies are in the IMF’s Special Drawing Rights group. The IMF uses this group of reserve currencies to make emergency loans to its 188 member nations.
IMF Adds China's Yuan to World's Top Currencies
The new IMF designation will take effect at the end of September 2016.
China had worked toward winning the designation for several years. To achieve it, China had to give up some of its tight control over its currency and make reforms in its financial sector, reported the New York Times.
The IMF decision reflects the declining influence of Europe in world financial markets.
“The renminbi is mainly replacing part of the euro’s role in the special drawing rights,” wrote the New York Times. It added that the renminbi is “quickly gaining ground on the euro.”
In the new IMF designation, the IMF will give more weight to China’s currency than to either the yen or the pound.
Despite the increased role for the yuan, the U.S. dollar still dominates in finance and trade, and is “the world’s pre-eminent reserve currency,” wrote the Wall Street Journal. It is still the most widely used currency for savings around the world. This is because investors feel confident that they can get access to money traded in dollars.
Christine Lagarde is the IMF Managing Director. She said the decision regarding the yuan is “an important milestone in the integration of the Chinese economy into the global financial system.”
She added that it was also “a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”
There are risks to being an IMF reserve currency. China limits the ability of businesses and individuals to transfer funds out of the country. But the more China opens its markets, the more it exposes its economy to “the risk of capital flowing out,” noted the Wall Street Journal.