The International Monetary Fund will include the yuan, also known as the renminbi, in a "basket" of currencies that makes up the reserves that the IMF uses to help manage economic problems.
To mark the launch of the new SDR basket, Ms. Christine Lagarde, Managing Director of the IMF, stated: "The expansion of the SDR basket is an important and historic milestone for the SDR, the Fund, China and the worldwide monetary system". This will have a positive effect on the exchange rate, as the RMB's status is now elevated to that of "reserve currency" along with other members in the SDR basket.
The board also decided at the time that the weights of each currency would be 41.73 per cent for the U.S. dollar; 30.93 percent for Euro; 10.92 per cent for the RMB, also known as the yuan; 8.33 per cent for the Japanese yen and 8.09 per cent for the British pound sterling.
China's central bank governors and former International Monetary Fund officials say the inclusion is a landmark event for the yuan's internationalization and a confirmation of the yuan's credibility.
China will use this opportunity to further deepen economic reforms and open up the sector to promote global growth, the PBOC said in a statement.
The yuan took on the mantle of a global reserve currency Saturday, a milestone that is seen breathing life into China's bond markets by prompting estimated inflows of as much as $1 trillion over the next five years.
However six years ago People's Bank of China governor Zhou Xiaochuan started lobbying intensively for the inclusion of the Yuan in the SDR basket.
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Reserve currencies are supposed to be freely convertible.
The IMF chief also said the RMB's inclusion is "an important step" in the integration of Chinese economy into the global financial and monetary system and it reflects the progress made in reforming China's monetary, foreign exchange, and financial systems.
However Julian Evans-Pritchard, a China specialist at Capital Economics, said the yuan's inclusion was not likely to drive foreign demand for it. The yuan has fallen 8 percent against the United States dollar over the last two years.
China should focus more on the stability in trade-weighted exchange rate rather than the USA dollar-yuan exchange rate.
The inclusion of the yuan, the world's fifth most widely used currency, marks the first time the fund has adopted a new currency to what it calls the Special Drawing Right valuation basket since the euro was added in 1999.
It is a very exclusive club, as far as currencies go.
"In practice, what determines whether central banks consider a currency a reserve asset is their confidence that they can sell that asset whenever needed into deep and liquid markets".
