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Business Insight

Yuan Named Reserve Currency

The Chinese yuan is moving up in the world rankings with an International Monetary Fund decision to include the renminbi in the basket of its reserve currencies from October 2016. The move is being seen as an important milestone in China's integration into the global monetary system.

The yuan will be included in the so-called Special Drawing Rights, or SDR basket, as a fifth currency along with the US dollar, the euro, the British pound and the Japanese yen. The basket is a reserve asset used to settle accounts when IMF member nations have a shortfall of foreign exchange. IMF officials review the basket every five years.

The yuan will account for more than 10 percent of the basket, ranking 3rd in weight after the dollar and euro. Its inclusion is an apparent reflection of China's large trade figures and wide acceptance in international transactions.

"The inclusion of the renminbi in the SDR basket of currencies is a recognition of the significant reforms which have been conducted, of the significant opening up of the Chinese economy, of the financial, more market-driven principles that are being used by the Chinese authorities going forward," says IMF managing director Christine Lagarde.

China's central bank has welcomed the IMF decision. Officials say the move recognizes the country's economic growth and the results of reforms. They claim it will improve the existing global currency system, and bring a win-win outcome for China and the rest of the world.

Peter Morgan, a senior consultant at the Asian Development Bank Institute, and a specialist on China's economy, offered his insight in an interview with NHK. He explained the significance of the move, and the consequent challenges that may face Chinese leaders.

"It's mainly symbolic at this stage," he said. "It recognizes the importance of the yuan as the global currency and of course also recognizes the importance of the Chinese economy in the global economy too. But given the fact that yuan is still only partially convertible on the capital account, I think its use as reserve currency is going to be relatively limited for the time being."

Morgan said Chinese leaders were eager to make the yuan a major currency, but warned they would find it a gradual process that presented big challenges as the economy slowed.

"They have already taken a number of steps, both in terms of liberalizing the currency, in terms of having been more affected by market forces than previously. Along with that, we've seen various moves to gradually open up the current account and the capital account.

"But we are still pretty far away from the freely floating currency. I think that's going to take a relatively long time. And one of the reasons for that is that the progress of the liberalization of both the financial sector domestically and of the capital account is still relatively slow."

Morgan added Chinese government officials were still somewhat cautious about opening up the capital account too rapidly. He said they were concerned about possible development of volatile capital flows either in or out of country, "and what effects that might have on domestic inflation, or the financial sector, as it bubbles, that kind of thing". "So I think it will still be a gradual process."

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