China welcomes Yuan inclusion as reserve currency

China today welcomed the IMF's decision to include yuan as its fifth reserve currency but dismissed concerns over depreciation amid economic slowdown in the world's second largest economy.
Including yuan in the Special Drawing Right (SDR) basket as the fifth international legal tender after the US dollar, the euro, the British pound and the Japanese yen, shows the IMF's recognition of China's economic development and reform achievements, China's central bank - the People's Bank - said.
"The joining of RMB (the Chinese renminbi) in the SDR basket means the international community has greater expectations on China to play an active role in the world economic and financial arena," it said in a statement.

Giving a stamp of approval of its being a global economic power, the International Monetary Fund (IMF) yesterday recognised Chinese Yuan as a reserve currency - a long cherished dream for the leadership in Beijing.
IMF Managing Director Christine Lagarde said that this "is an important milestone in the integration of the Chinese economy into the global financial system".
Such a move from the IMF at a time when the Chinese economy is slowed down and has been overtaken by India in terms of growth rate, is seen by many experts a move by the international body to encourage China for a new set of economic reforms.

"Expectations have already been riding high that the board would formally announce the RMB's inclusion, which implies that a lot of near-term expectations should already be factored into the RMB movement," HSBC said.

The PBOC also played down reports that it may lead to further depreciation in future.
"There is no basis for continued yuan depreciation, and China is capable of keeping the currency basically stable at a reasonable level," China's central bank vice governor Yi Gang told a press conference, citing high-medium growth and foreign exchange reserves as major factors underpinning the currency.
"In case of drastic fluctuation or abnormality in international balance of payments and cross-border capital flow, the central bank will not hesitate to intervene," Yi added.

The IMF will include the Chinese currency to its SDR basket from October 1, 2016 with a weighting of 10.92 per cent, as the currency has "met all existing criteria".
The weighting of the other currencies in the basket is 41.73 per cent for the US dollar, 30.93 per cent for the euro, 8.33 per cent for the Japanese yen and 8.09 per cent for the British pound.
Following the IMF announcement, the central parity rate of the yuan weakened by 11 basis points to 6.3973 against the US dollar today, according to the China Foreign Exchange Trading System.
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The long-awaited outcome came as China has been pushing its currency to wider use on the global stage.
To meet the IMF "freely usable" criteria, Chinese authorities undertook a series of reforms in recent months, such as improving its foreign exchange rate formation system, opening up its interbank bond and forex markets, and improving data transparency by subscribing to the IMF's Special Data Dissemination Standard (SDDS), the report said.
While the immediate benefits of the yuan's SDR entry may be limited, economists have looked beyond the symbolic significance of the label to far-reaching implications for China's economic and financial reforms.

Wang Tao, a UBS economist, expects a 5 per cent depreciation of the yuan against the US dollar in 2016 in a gradual rather than one-off manner, state-run Xinhua news agency reported.
"The significance will continue to lie in all the necessary financial reforms and the capital-account opening to achieve a positive outcome and further advance RMB internationalisation," Wang said.
Following the IMF decision, PBOC vowed to speed financial reforms and opening up to make positive contribution to global economic growth, financial stability and economic governance.
In an article published last week by the state-run People's Daily which mainly reflects views from the leadership, central bank governor Zhou Xiaochuan pledged to make the RMB a convertible, freely usable currency when expounding China's financial reform agenda in the next five years.

He, however, warned in the same article against any possible financial attacks or sanctions from overseas in some extreme circumstances.
He expected the share of RMB use in cross-border trade settlement will exceed one-thirds by 2020, and the yuan will become an international currency by that time.
The IMF decision would represent global acknowledgement of China's rising influence in the world economy, experts say.
Chen Fengying, an expert from the China Institutes of Contemporary International Relations, told the Global Times yesterday that the yuan's inclusion would further speed up the currency's internationalisation.
"This is a green pass for the yuan to enter the global market," she said, adding that although the process has gained momentum with the government's push and market demand, the IMF's recognition would further accelerate the process.

Lagarde said the inclusion is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems.
"The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy," she said.
The inclusion of the RMB will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world's major currencies.