China’s currency received a major status boost when the International Monetary Fund (IMF) announced Monday the renminbi will be added to its basket of currencies used to make up the Special Drawing Right (SDR).
It’s slated to join the ranks of the U.S. dollar, pound sterling, euro and Japanese yen in the IMF’s elite group in October 2016.
After completing its five-year review, the executive board deemed the renminbi suitable to be included in IMF’s leading reserve currencies, used for international emergency lending to member countries.
“The Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system,” IMF managing director Christine Lagarde said in a statement. “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.”
Joining the basket of currencies is one of the country’s strong priorities, even having made reforms to allow more transparency into its financial system in an attempt to gain more recognition and influence.
Some economists project the addition is the first step toward China, the world’s second largest economy, overtaking the dollar as the top reserve currency.
“Ultimately China would like to see, as a number of countries would, the dollar end its reign as the global reserve currency,” Malcolm Polley, chief investment officer at Stewart Capital Advisors, tells Reuters, adding he doesn’t believe it is a possibility until another country matches the dollar’s security.
But American Enterprise Institute scholar Desmond Lachman says he doesn’t anticipate China will make a meaningful move against the dollar in the near future.
“My view is that if the Chinese follow the IMF‘s advice of allowing their currency to be more market determined and to further open up their capital account, the Chinese currency would depreciate a lot as Chinese residents would send capital abroad,” he tells The Daily Caller News Foundation.”Rather my expectation is that China will use its large international reserves and tighten rather than loosen capital controls to keep their currency relatively strong.”
Lachman adds that he doesn’t believe China will provoke the U.S. during an election year by allowing its currency to depreciate.
Using a new formula to determine currency weights, the dollar dropped from 41.9 percent to 41.73 percent, the Euro took a steep hit dropping over 7 percent to 30.93 percent, the renminbi came in at 10.92 percent knocking the yen and pound down to 8.33 and 8.09 percent, compared to their 2010 levels which stood at 9.4 and 11.3 percent respectively.
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