IMF approves yuan for currency basket

Decision will help pave the way for broader use of yuan; Changes could inject volatility into Chinese economy

The International Monetary Fund (IMF) on Monday approved the Chinese yuan as one of the world's main central bank reserve currencies, a major acknowledgement of the country's rising financial and economic heft.

The IMF decision will help pave the way for broader use of the yuan in trade and finance, securing China's standing as a global economic power. But it also introduces new uncertainty into China's economy and financial system, as the country was forced to relax many currency controls to meet the IMF requirements.

The changes could inject volatility into the Chinese economy, since large flows of money surge into the country and recede based on its prospects. This could make it difficult for China to maintain its record of strong, steady growth, especially at at a time when it economy is already slowing.

The IMF will start including the yuan in the fund's unit of accounting, the so-called special drawing rights (SDR), at the end of September. Many central banks follow this benchmark in building their reserves, so countries could start holding more yuan as a result. China will also gain more influence in international bailouts denominated in the fund's accounting unit, like Greece's debt deal.

China's leadership has made it a priority to join this group of currencies, naming it in October as one of their highest economic policy priorities in the coming years. The yuan's new status "will improve the international monetary system and safeguard global financial stability," President Xi Jinping of China said in mid-November.

In the months before the IMF decision, China took several actions to make sure that the yuan was more widely embraced. China did so partly to meet the IMF's rule that a currency must be "freely usable" before it can be included in this benchmark.

China and Britain have sold yuan-denominated sovereign bonds for the first time in London, which has emerged as Europe's hub for the currency. Even Hungary has announced plans to issue its own yuan-denominated bonds as well, while the Ceinex exchange in Frankfurt has begun trading funds this month based on yuan bonds. Preparations began to trade yuan-denominated oil contracts in Shanghai, where copper and aluminium contracts are already sold.

Most important, China began changing the way it sets the value of the yuan each morning. In doing so, it abruptly devalued the currency.

The entry itself into the special drawing right is mainly symbolic. But such broader moves toward greater financial transparency and easier trading - part of the process to meet the IMF requirements - will have long term effects on the yuan's usage.

"There's this obsession with the SDR, and it's completely out of proportion to its economic impact, which is likely to be trivial," said Randall Kroszner, a former Federal Reserve Board governor who is now an economics professor at the University of Chicago.

"It may be that in the drive to get into the SDR, they may make changes that make the yuan more attractive for international market participants."

©2015 The New York Times News Service