The Chinese currency has just entered a new phase in its journey to become more important to the world economy: Starting today, the yuan is officially a member of the International Monetary Fund’s basket of global reserve currencies.
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. The value of the SDR is determined by the set of currencies in the basket, each of which is given a weighting toward the final calculation.
Here are the new weights, with the yuan joining the US dollar, euro, yen, and pound.
That is a very exclusive club, as far as currencies go. The yuan is the first to be added to SDR since the euro in 1999, though that was only to replace the phased-out Deutsche mark and French franc.
Inclusion in SDR is largely symbolic for China, which has been trying for years to promote the yuan globally, in part to move the world away from reliance on the dollar as the prevailing reserve currency. The change will not lead to a precipitous rise in demand for yuan because the total value of SDRs used as reserves pales in comparison to that of dollars.
In short, the yuan will not be threatening the dollar’s reserve status anytime soon, and will have a hard time doing so without further liberalization of the currency from the Chinese government. But at the very least, Beijing can say it has won a hard-fought battle to have its currency recognized by the IMF, which rejected its application to SDR in 2010.