Rajiv Biswas, Asia-Pacific chief economist at IHS, discusses how the yuan’s depreciation will affect global markets.
The International Monetary Fund has approved China’s yuan into its elite reserve currency, in a decision described as “an important milestone” for the world’s second largest economy.
With the decision, the yuan, also known as the renminbi, will join the US dollar, euro, Japanese yen and British pound next year in the list of currencies the IMF uses as an international reserve asset.
Christine Lagarde, IMF managing director, called the decision “an important milestone in the integration of the Chinese economy into the global financial system”.
“It 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,” she said.
The decision by the IMF executive board solidifies China’s ambition to see the government-controlled yuan achieve global status as one of the world’s top currencies alongside the US, Europe and Japan.
China asked last year for the yuan to be added to the Fund’s Special Drawing Rights list.
As recently as August, the IMF considered the currency too tightly controlled to qualify.
However, IMF staff experts in early November said that China had taken the steps necessary for the yuan to be called “freely usable”, opening the way for Monday’s decision.
Lagarde said the yuan’s inclusion in the basket was expected to help China to open up further to the world economy.
As a result of the IMF decision, China would become a “much more responsible financial power”, Ann Lee, an economics professor at New York University, said in an interview with Al Jazeera.
“They know that now they’ve got the status. They’re going to try to uphold their end of the bargain.”
The unexpected devaluation of the yuan last August received good marks from the IMF as it expanded the currency’s movements based on market forces.
In addition, China announced last week that an initial group of foreign central banks had been allowed to enter the Chinese currency market, which was likely to promote further internationalisation of the yuan in global trading.
IMF members can use the Special Drawing Rights list to obtain currencies to meet balance-of-payments needs.
The Fund also issues its crisis loans – crucial to struggling economies such as Greece – valued in SDRs.
The yuan’s entry into the IMF list takes effect on October 1, 2016.
The decision puts the Bank of China under pressure to provide more transparency in line with its peers, such as the Federal Reserve and the European Central Bank.