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Earlier this week, the International Monetary Fund (IMF) made the decision to include China’s currency, the Yuan Renminbi (RMB), to its Special Drawing Rights (SDR), the organization’s basket of supplementary foreign exchange reserve assets that already includes the US dollar ($), Euro (€), British pound (£) and Japanese Yen (¥).

This move marks an increase in confidence in the RMB’s importance to the global economy and is a step in the right direction in China’s efforts to internationalize its currency. It’s also significant since the RMB is the first currency from a developing or emerging market to be listed in the IMF’s SDR basket.

In 2015 alone, the Chinese Yuan Renminbi became the forth most used currency throughout the world, serving as a reserve currency in Chile, Nigeria, Thailand, Australia and South Africa.

Commenting on the RMB’s addition, Ms. Christine Lagarde, the IMF’s Managing Director of the IMF, said, “The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

The Chinese Yuan Renminbi: Strength & Importance!

Many pundits commented on the inclusion, highlighting the strength and importance of the Chinese currency to the world economy.

Mark Boleat, Policy Chairman of City of London Corporation, said, "Although the yuan internationalisation is expected to progress regardless of the IMF's decision, admission of the currency to the SDR basket would help build confidence in the long-term nature of the trend of wider international yuan usage, encourage more central banks to hold the yuan as part of their foreign exchange reserves and, by extension, the availability and demand for yuan-denominated assets."

According to Ding Yifan, Senior Fellow at the State Council’s Development Research Centre’s Institute of World Development, “the yuan is the only sovereign currency that could potentially challenge the US dollar; even if China wants to keep its head down, the fact can’t be denied.”

Politically speaking, this move has also improved China’s positioning vis-à-vis the West.

Houston-based Rice University’s James A. Baker III Institute for Public Policy commented on the decision, saying, “On the political side, by endorsing China’s economic ascent, the IMF earns China’s goodwill and support. This is good for the West and Japan, because the IMF represents their value system.”

Chinese Policy Changes Helped the Yuan Renminbi

Many policies changes implemented by the Chinese government this year facilitated the decision by the IMF to include the currency in its SDR basket.

According to a South China Morning Post article penned by Wendy Wu, in August 2015, “the central bank ended a soft peg to the US dollar… and revised the pricing mechanism to set yuan/dollar central parity to make the rate reflect closing prices the previous day. It intervened later to narrow the spread of onshore and offshore yuan rate.”

Several other developments in China’s money markets are bound to make the RMB an even bigger protagonist in the world stage.

Another South China Morning Post piece mentions that the country’s “monetary authorities are also expected to soon start a programme allowing individuals to make direct outbound securities investments; raise the quota for two-way securities investments under pre-existing arrangements, and launch a stock connect scheme between the Shenzhen and Hong Kong bourses.”

Furthermore, the article states, “foreign exchange traders are anticipating an extension of onshore trading hours to overlap with those of the offshore market, while brokers expect the PBOC in future to intervene in the forex market only in extreme cases.”

Credit for this accomplishment must go to China's Central Bank Head Zhou Xiaochuan, who’s manned the post for the past thirteen years and has pushed market-oriented gradualism as economic policy.

Zhou Xin, writing for the South China Morning Post, says, “Zhou is believed to have been at the centre of almost every change China has made to its financial system - from reshaping state banking to setting up the bond market to laying the foundations for the yuan to go global.”

The RMB’s addition to the basket will take place in October 2016 and will carry a weight of 10.92 percent compared to 41.73, 30.93, 8.33 and 8.09 for the dollar, euro, yen and pound, respectively.