Chinese yuan set to be inducted into IMF currency basket

China's yuan is poised to enter the International Monetary Fund's (IMF's) elite SDR basket of currencies, raising Beijing's banknotes to the status of global reserve asset.

In a policy milestone long sought by the Chinese government, which oversees the world's second-largest economy, the yuan now joins a prestigious club of major international reserve currencies also comprising the US dollar, pound, yen and euro.

The move will formally occur Saturday, with the yuan's induction following a decision first announced in November last year, when the IMF found that China's currency met the standard of being "freely usable".

Beijing has sought in recent years to expand use of the yuan, also known as the renminbi, or "people's currency," which has doubled its share of global currency trading to an average daily turnover of $202 billion since 2013, moving well into the top 10 but still trailing other major currencies, according to the Bank for International Settlements.

Created in the 1960s, the "Special Drawing Right" is a unit of account used by the International Monetary Fund as a foreign exchange reserve asset and is not a freely traded currency. To help manage financial crises, the Fund issues loans to member countries denominated in SDRs.

Chinese authorities have progressively allowed the yuan to trade directly against other major currencies, adding the pound and euro in 2014. That year, Beijing asked for the yuan to be included the SDR basket.

The yuan's inclusion could push central banks and sovereign funds to diversify further by increasing their yuan holdings, according to Dariusz Kowalczyk of Credit Agricole.

"This is because there is a strong correlation between a currency's weight in the basket and its share in global FX reserve allocation, and because of the attractiveness of China government bonds," he said.

The yuan enters the SDR basket with a weight of 10.92 per cent, versus 41.73 per cent for the dollar and 8.33 per cent for the yen.

However Julian Evans-Pritchard, a China specialist at Capital Economics, said the yuan's inclusion was not likely to drive foreign demand for it.

"Contrary to what many seem to believe, this does not require that IMF members shift out of euro, yen and sterling assets into renminbi assets. Instead, it simply means that the renminbi exchange rate will begin to influence the value of SDRs," he said.

"In practice, what determines whether central banks consider a currency a reserve asset is their confidence that they can sell that asset whenever needed into deep and liquid markets. Central banks are likely to come to their own judgement," he added.