Don't Let the IMF Fool You - It Had No Choice But to Add China's Yuan

china-fistChina's yuan is now a global reserve currency.

The International Monetary Fund (IMF) made it official on Monday. A few weeks earlier on Nov. 13, the organization had recommended the yuan, also known as the renminbi, to be included in its $280 billion basket of currency reserves known as Special Drawing Rights (SDR).

Now the Chinese yuan is placed alongside the U.S. dollar, the Japanese yen, the British pound, and the euro, where it will make up 10.92% of the basket.

Of course, the IMF would have us believe it "allowed" the yuan into its basket, as though it was the one in control...

Managing Director Christine Lagarde said the yuan's inclusion was based on "a clear indication of the reforms" China has carried out.

What It Means to Be a Global Reserve Currency

Reserve currencies are held in significant amounts by governments and institutions around the world in order to help conduct transactions in the global market.

Designation as a global reserve currency sends a message about a currency’s economic heft to the rest of the world. To be in this VIP club, a currency must be “widely used,” “widely traded,” and “freely usable,” according to the IMF.

Indeed, the IMF has pushed China toward economic reforms. Earlier this year on Aug. 4, the IMF said China would have to move ahead with market liberalization before it would allow the yuan in.

"The [August IMF] report signals that the decision about the yuan's inclusion in the basket will hinge on financial market development, further opening of the capital account, and greater exchange rate flexibility," Cornell University professor Eswar Prasad told The Wall Street Journal on Aug. 4.

But the truth is the IMF had to include China's currency in its basket - sooner rather than later. The cart's been ahead of the horse for some time on this one...

"China doesn't need the IMF, all it wants is the legitimacy a 'reserve currency' confers on the nation," Money Morning Capital Wave Strategist Shah Gilani said on Monday.

It's actually the other way around - the IMF is the one that needs the yuan. Here's why...

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The IMF Needed China's Yuan - Not the Other Way Around

IMF Managing Director Christine Lagarde at a press conference in Berlin on March 11, 2015.

"While the IMF's decision looks to be an academic nod to China becoming the world's second-biggest economy, it's actually more of a political and practical approach to China's global power," Gilani said. "Politically, the IMF has to deal with the reality that China is too big to push around. The country will just go around the IMF and any other U.S.-centric banking or lending body for its own purposes."

For example, China already successfully snubbed the World Bank - a sister institution to the IMF - when it started the Asian Infrastructure Investment Bank (AIIB).

For the past two years, Beijing has quietly lobbied other countries in Asia and Europe to sign onto the AIIB after President Xi Jinping first proposed it in October 2013. At the AIIB's signing ceremony on Oct. 24, 2014, 21 countries jumped aboard, including India and Singapore. This year, Western countries began to join, among them Germany, France, Switzerland, Italy, Luxembourg, and New Zealand.

On June 29, representatives of 50 countries gathered in Beijing to establish the $100 billion bank. The institution will launch with China having a 30.4% share of equity, followed by India (8.5%) and Russia (6.7%).

Notably absent was the United States.

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