What you need to know about China’s yuan added as a global reserve currency

CCTV News

Photo by Xinhua News Agency. Photo by Xinhua News Agency.

The International Monetary Fund decided Monday to include China’s yuan (also known as the renminbi), will join the dollar, yen, euro, and pound as part of the global currency basket known as the Special Drawing Right, or SDR. Here’s what you need to know about it.

CCTV America’s Shraysi Tandon reports.

IMF decides to include yuan in SDR currency basket

IMF decides to include yuan in SDR currency basket

The International Monetary Fund decided Monday to include China’s yuan (also known as the renminbi), will join the dollar, yen, euro, and pound as part of the global currency basket known as the Special Drawing Right, or SDR. Here's what you need to know about it. CCTV America's Shraysi Tandon reports.

Chinese officials welcome the IMF’s decision. China’s Vice Finance Minister Zhu Guangyao says this decision will benefit both China and the rest of the world.

China welcomes inclusion of RMB in SDR basket

China welcomes inclusion of RMB in SDR basket

China's central bank welcomes the decision of the International Monetary Fund (IMF) to include Chinese currency renminbi in the Special Drawing Rights (SDR) basket.

 

What is the SDR? 

The International Monetary Fund has announced that China’s currency, the yuan, has joined the dollar, yen, euro and pound as part of the global currency basket known as the Special Drawing Right, or SDR. What’s the Special Drawing Right? Watch this explainer. #Yuan #SDR

Posted by CCTV America on Monday, November 30, 2015

Special Drawing Rights is a financial instrument created by the International Monetary Fund, which acts a bit like an international currency. A certain amount is allocated to its members. Members can hold their SDRs as part of their international reserves, or sell part or all of their SDR allocations.

SDR is not a currency like the dollar or yuan. So you can’t buy a pair of shoes with it. Neither can a SDR holder claim back money from the IMF. But SDR does have a price tag on it. At the moment the value of the SDR is determined on a daily basis by a basket of four leading currencies of the world: the U.S. dollar, euro, British pound, and the Japanese yen.

How does the SDR work? Since its value has been connected to the four currencies, any holder can trade it with other countries, or holders, for any of the four currencies when faced with a reserve shortage and seeking more liquidity. This is the most important function of SDR. The SDR can also be used as a standard unit of account, as national currencies and interest rates often fluctuate. There are a few countries that peg their currencies to SDR as well.

How important is each currency? The proportions of each SDR currency in the basket are: U.S. dollars ($) 41.9 percent, euro (€) 37.4 percent, pounds sterling (£) 11.3 percent, and Japanese yen (¥) 9.4 percent. The weights designated to them are in line with their current significance in international trade and national foreign exchange reserves.

The yuan in the SDR: Good or bad for China?
China and global financial security. In 2009, China’s central bank governor Zhou Xiaochuan pointed out that the world should learn from the 2008 financial crisis about the danger of having the global finance system relying heavily on the currency of one single country. He suggested that SDR should perform more functions.

Inclusion in the SDR would also help China’s effort to internationalize its currency and gain international economic influence. To be included in the SDR means Chinese economy will be more globalized and market-oriented.

Being included in the SDR should also increase demand for the yuan.

What does this all mean for the dollar?

What does this all mean for the dollar?

What does this all mean for the dollar?
The U.S. dollar is the most recognizable trading currency in the world, because the U.S.’s economy is still the strongest on the planet. In order to do business with international partners, a country must have some “recognizable money” in its account. The SDR currencies, is this “recognizable money” although the dollar makes up the lion’s share of it.

The U.S. dollar is still the official currency of the United States, which means the right to determine its value is held by America.

American debt is directly in dollars. This gives it a huge advantage. Suppose a company makes living in China but has to pay its debt in dollar, the company would have to pay more whenever the dollar’s value increases. This currency mismatch, which can leave an economy in huge debt trouble, is less of a burden for the U.S.’s borrowers.

This means that the U.S. government and companies are able to borrow across the whole world at a comparative low price.

This economic importance is also thought to give America an international political advantage.

The yuan’s inclusion into the SDR will not change the dollar’s importance directly but is seen as a rebalancing as the international community increasingly moves towards a multipolar world.