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Chinese yuan to become one of the world’s main reserve currencies

The International Monetary Fund has decided to add the Chinese yuan to its basket of elite currencies that make up its lending reserve, marking a major acknowledgment of China's ascendancy as a global economic power.

The decision followed the Fund's five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR), which are supplementary foreign exchange reserve assets that are based on key international currencies. This basket currently consists of the U.S. dollar, the euro, the British pound, and the Japanese yen.

The inclusion of the Chinese yuan will be effective October 1, 2016, to give Fund members and other SDR users enough time to adjust to the change.

"The Executive Board's decision to include the RMB (Chinese renminbi) in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system," said Christine Lagarde, the Managing Director of the IMF. "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."

Lagarde added: "The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy. ... The inclusion of the RMB will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies."

Under the new basket, the U.S. dollar will be weighted 41.73%, the euro 30.93%, the Chinese yuan 10.92%, the Japanese yen 8.33%, and the British pound 8.09%. In the current basket, which remains in effect until October 2016, the U.S. dollar is weighted 41.9%, the euro 37.4%, the British pound 11.3%, and the Japanese yen 9.4%.

The SDR is neither a currency, nor a claim on the IMF, but is rather a potential claim on the freely usable currencies of IMF members. Holder of SDRs can obtain these currencies in exchange for their SDRs in two weighs, either through the arrangement of voluntary exchanges between members or through the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. A total of 204.1 billion SDRs have been allocated to date.

The SDR basket is determined by assessing members or monetary unions whose exports had the largest value over a 5-year period, and which have been determined by the IMF to be "freely usable." The export criteria is meant to ensure that only currencies that play a central role in the global economy can be included. The basket was previously limited to four currencies, but will now be expanded to five.

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