China’s yuan was officially included into the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket of currencies Oct. 1, signifying an important milestone in the country’s goal of internationalizing the currency.
“The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets,” IMF Managing Director Christine Lagarde said.
The SDR currency reserve, created in 1969, is based on a basket of major global currencies and is used to supplement its member countries’ official reserves.
There was some concern over the possibility of exchange rate fluctuations in the yuan’s value as it joined the basket, but this concern lessened due to China’s use of a managed float exchange rate which is adjusted against a separate basket of currencies. China’s large commodities trade surplus, balanced capital flows and foreign exchange reserves also stabilized the currency.
The yuan’s exchange rate has remained relatively stable after the IMF announcement Dec. 1, 2015. However, China’s sky-high housing market prices could be a potential issue for the yuan’s value if the government cannot avoid printing more money to cool the market solely with purchasing curbs.