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Why China’s Yuan Is Set to Join IMF’s Elite Club: QuickTake Q&A

From Oct. 1, China’s yuan gains a new status as a member of the International Monetary Fund’s Special Drawing Rights (SDR) basket. That makes it part of one of the global economy’s most exclusive, if esoteric, clubs.

What is an SDR?

SDRs were created by the IMF in 1969, when the world’s governments needed assets for their international reserves and there wasn’t enough gold or dollars to go round. While the SDR isn’t a currency itself, its holders have a claim on the currencies in the basket. The yuan’s addition is the first change to the SDR basket since 1999, when the euro replaced the deutsche mark and the French franc. The weightings will be:

CurrencyWeighting
Dollar41.73%
Euro30.93%
Yuan10.92%
Yen8.33%
British pound8.09%

How important are SDRs?

By value outstanding, not very. There were 204.1 billion SDRs allocated to IMF members as of March, equivalent to around $285 billion, compared with about $11 trillion of global reserves.

So why did China want in?

The yuan’s inclusion is a recognition of China’s importance in the global economy and the steps it’s taken to make the currency more freely traded. Plus, the SDR basket, small though its use may be, offers competition of sorts to the greenback. In a landmark 2009 essay, People’s Bank of China Governor Zhou Xiaochuan argued that a global system so reliant on a single currency -- the U.S. dollar -- was inherently prone to shocks. That conviction set off a global push by China’s leaders, including now-President Xi Jinping, to have the yuan included.

What did China do to get in?

After a 2010 review, when the IMF said the yuan didn’t meet its criteria for inclusion, China worked hard to make the grade. Policy makers made the yuan fixing more market-based, expanded overseas access to the bond market, sold debt in London and staged drastic interventions to close the offshore exchange rate’s gap with the onshore level.

What’s still on the to-do list?

Analysts argue that for the yuan to become a major global reserve currency, China needs to further open up to foreign investment and pledge to maintain that access even when markets move in a way that officials don’t like. Heavy-handed state intervention in the wake of last year’s surprise devaluation led some to doubt China’s commitment to giving market forces more sway.

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