Question

The Chinese Yuan has been included in the valuation of IMF Currency called Special Drawing Rights (SDR). What are the possible impacts of the inclusion of Yuan to the SDR basket for the international financial system?

Answer 1

The IMF has now recognised the yuan as a global reserve currency.  

• Yuan’s inclusion in the basket signifies that the IMF believes that China’s currency in now capable of having an equal standing as the other four currencies currently in the basket which include the Dollar, the Euro, the Sterling and the Yen.
• This step is important for the integration of the Chinese economy into the global financial system. It also recognises the initiative the Chinese authorities have taken towards reforming China’s monetary and financial systems.
• Global Organisations such as World Bank will increase their exposure to Yuan ,when the SDR is updated .
• the Chinese currency will now be “freely usable” that is it will be widely used to fund the international transactions . The People’s Bank of China would allow the currency to be determined by market forces that is supply and demand.This may encourage central banks around the world to increase their exposure to the Yuan and diversify their foreign exchange reserves as this currency is now included in the SDR special basket.
• As the demand from central banks and investors for the Chinese yuan will increase, it may result in currency appreciation for the Yuan in the long-term.
• A strong Chinese Yuan would make Chinese goods expensive and make consumers globally shift to other products and this would reduce china's surplus which was a major cause for creating a global imbalance.