China's yuan officially joins the SDR

The currency-strategist-in-chief

The Chinese yuan officially joined the United States dollars, the Euro, the Japanese Yen and the British Pound Sterling as a global reserve currency.

Together, this group of currencies, known as Special Drawing Rights (SDR), forms a kind of pseudo-currency-used only by the IMF-to supplement countries' official reserves.

In a statement Friday in Washington, IMF chief Christine Lagarde called the yuan action an "historic milestone".

This is the first time the SDR has been expanded to include an additional currency.

With the new addition, International Monetary Fund will weight the dollar at 41.73 percent, the euro at 30.93 percent, the yuan at 10.92 percent, the yen at 8.33 percent, and the pound at 8.09 percent.

While an International Monetary Fund statement Friday said the yuan has been deemed freely usable, China has been suspected of meddling in the foreign-exchange market after a shock devaluation in August previous year rattled investor confidence.

"The continuation and deepening of these efforts, with appropriate safeguards, will bring about a more robust worldwide monetary and financial system, which in turn will support the growth and stability of China and the global economy", she said.

The yuan took on the mantle of a global reserve currency yesterday, a milestone that is seen breathing life into China's bond markets by prompting estimated inflows of as much as US$1 trillion (S$1.4 trillion) over the next five years.

In July 2009, China approved pilot program for cross-border trade settlement in RMB, embarking on the internationalization process of the Chinese currency.

The International Monetary Fund on Friday announced a recalculation of its stable of major currencies ahead of the Saturday debut of the Chinese yuan in the prestigious collection of reserve assets.

With growing attention to the effect brought by the inclusion of the Chinese yuan to the worldwide financial system, the world now expects China to play a bigger role in global rule-making, the economist added. "This is ultimately determined by the willingness of global central banks to hold the issuer's currency and financial instruments".

It is a very exclusive club, as far as currencies go.

U.S. Treasury Secretary Jack Lew said on Thursday the yuan is "quite a ways" from true global reserve currency status.

"Our economic growth and activities will lead our trade to use more renminbi in the future", he said.

In August of previous year, China suddenly devalued the yuan, causing investors to dump the currency in volumes not seen since 1994 and sparking an outflow of capital from China.

Zhang Min, the country manager at the Bank of China's Jakarta branch, said the use of the renminbi would promote trading and economic development in Indonesia and China and reduce unnecessary foreign exchange losses.

"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".

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