BEIJING -- The yuan took an important step toward becoming a global currency Saturday, joining the basket used by the International Monetary Fund to determine the value of its currency-like reserve asset.
Special Drawing Rights are issued by the IMF. Their value is the sum of specific amounts of basket currencies at dollar-denominated exchange rates. The basket now consists of the dollar, the euro, the yen, the pound and the yuan.
The IMF issues SDRs to member countries according to their capital contribution ratios. A country facing a foreign-currency shortage can acquire dollars or other currencies by pledging SDR holdings to another country. Only countries and public institutions can hold SDRs. The decision to add the yuan to the basket was made last November.
Punching above its weight
The yuan has more influence than the yen or the pound on SDRs' value. The Chinese currency's weight in the basket is 10.92%, compared with 8.33% and 8.09% for its Japanese and British counterparts.
"It embodies the full recognition accorded by the international community to China's reform and opening up," said Geng Shuang, a spokesperson at the Chinese Ministry of Foreign Affairs, of the inclusion at a Tuesday news conference.
China's trade volume helps explain why the currency got a more prominent position than the yen and the pound. The country settled 29% of its trade, including exports to and imports from Hong Kong, with yuan in 2015. Yuan are now also used to pay for oil, breaking the greenback's monopoly as the settlement currency for oil trade.
Not there yet
Freedom of use is a criterion for becoming an SDR basket currency. In this area, "the yuan received very lenient treatment by the IMF," said a former official at Japan's Ministry of Finance.
U.S. Treasury Secretary Jack Lew said Thursday that the yuan has "quite a ways" to go to become a global reserve currency, Reuters reported, suggesting that further reform will be needed.
As Lew pointed out, Beijing has been dragging its feet on currency exchange and capital controls. The yen joined the SDR basket in 1974. By then, the currency was trading freely under a floating-rate regime. But when the yuan will do so is unclear.
In addition, Chinese individuals cannot sell more than $50,000 in yuan a year. The government insists that this is a voluntary measure adopted by banks. But Beijing's hand in the sector is apparent, as seen in its decision this year to reassert de facto control over lending and deposit rates.
Such a controversial step was taken to suppress capital outflows, which spiked after the yuan's devaluation in August of last year. China still runs trade surpluses, but direct investment and securities investment continue to record net outflows.
"The Chinese government is neither willing nor ready to liberalize capital transactions," said Xiang Songzuo of Renmin University of China.