Yuan and SDR: a welcome change for China and world

BEIJING - With the International Monetary Fund (IMF) including the yuan in an elite reserve currency basket, the Chinese currency ascended to the heart of global finance in a move that should be welcomed by both China and the rest of the world.

It's hard to overestimate the significance of the decision, a landmark recognition of China's increased role in the global economy and major progress in the evolution of the international financial system.

The IMF announced on Monday that China's currency renminbi (RMB) is eligible for joining the Special Drawing Rights (SDR) basket as an international reserve currency.

It brings the renminbi, or the yuan, into an exclusive group of currencies that make up the IMF's own reserve basket, which is currently comprised of the US dollar, the euro, the British pound and the Japanese yen.

The inclusion of the RMB will take effect Oct 1, 2016, the IMF said in a press release.

The Chinese yuan clearly deserves a place in that grouping. China is the world's second-biggest economy and top trader, and its currency is liquid and stable enough to serve as a store of value.

The inclusion was a natural result of the yuan's rise. In five years after being rejected by the IMF in 2010, the yuan made impressive strides in internationalization. It now ranks fifth as a global payments currency and seventh as a global reserve currency, according to the Society for Worldwide Interbank Financial Telecommunication. Dozens of countries have currency swap deals with China.

Despite some remaining controls on the capital account, the yuan is already freely usable for countries in international payments and currency trading.

Official foreign institutions are able to enter China's bond and exchange markets now, a stock connect between the mainland and Hong Kong has been established, interest rates for deposits have been liberalized, the yuan's exchange rate has become more market-based, and yuan-denominated bonds were issued in London earlier this year, for the first time outside China.

Without the inclusion of the yuan, the representativeness of the SDR and the legitimacy of the IMF would have been questioned.

By allowing an emerging-market currency into the SDR basket for the first time, the IMF showed its willingness and ability to adapt to global economic reality.

An improved international monetary system that no longer neglects the voices of growing emerging economies will benefit both China and other countries.

The move will not only boost the yuan's credit but also get China to share responsibility for risk management in the global financial system, as the SDR was created to meet countries' need for reserves during times of crisis.

In particular, it was a vote of confidence in China's reform to further open up its capital account and financial system.

While spurring global yuan investment, the SDR inclusion will commit China to liberalizing its financial system, making it more sophisticated and efficient. That will help China's economy upgrade to consumption- and innovation-driven growth and in turn support the long-term prosperity of the world economy. A more open capital account will also generate stronger interest in overseas investment by Chinese.

By encouraging such reforms, the IMF decision on Monday will eventually lead to closer interplay between China's economy and the rest of the world, as the country's accession to the World Trade Organization did more than a decade ago. And like the latter, it will leave an indelible mark on history.