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Inclusion of Yuan in SDR

What is SDR?

Special Drawing Rights are supplementary foreign exchange reserves defined by the IMF(International Monetary Fund) in the year 1969. SDR is basically a currency basket which was introduced to solve the problems of liquidity in the International Market. Initially, it contained four currencies – U.S Dollar, Sterling Pound, Euro and Japanese Yen. IMF allows its member countries to withdraw any type of reserves within a specified limit.

Inclusion of Yuan in SDR

On 30, Nov2015 executive members of IMF decided to include China’s currency Yuan in the SDR. This decision has been taken after evaluating China’s performance since 5 years. For any currency to be included in SDR, the currency should be stable and transactional throughout the world.

Christine Lagarde, Managing Director of the IMF, following the review meeting said, “The Executive Board’s decision to include RMB (Renminbi Yuan) in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”

This major decision that is a crucial step towards reforming China will be implemented from 1st Oct 2016. From the last couple of months, China has shown a slow growth rate and has projected its growth @6.5% for the next 5 years.

These inclusions will not only help China to create pace again but also to solve its International liquidity problem. China Yuan will form 10.92% of the total SDR.

Steps were taken by China for this inclusion

Devaluation and Upward of Yuan

From the last 6 months, China has struggled a lot. A weaker domestic and international demand and an excess supply.

On 12 August 2015 Central People’s Bank of China has devaluated the currency by 1.9% against the dollar. The intention behind this is to increase earning from exports.

IMF had suggested China to upward the Yuan for inclusion in SDR since China’s currency was undervalued.

On 3Nov, 2015 Central People’s Bank of China had upward the Yuan by 0.54% against the U.S dollar. This increase was the largest seen since 2005