Updated 11:29 AM EDT, Tue, Jun 16, 2020

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IMF to Make Chinese Yuan Reserve Currency in Historic Move

Chinese New 100 Yuan Notes Wheeled Out

(Photo : ChinaFotoPress/Getty Images) The yuan is set to be granted special drawing rights (SDR) by the International Monetary Fund (IMF).

China's Yuan is expected to be included in the International Monetary Fund's (IMF) basket of currencies with Special Drawing Rights.

Money Control reports that the SDR is a type of international reserve asset that was originally created to buttress the old fixed rate system used in earlier years. It's use waned when the old system was replaced with freely-moving market currencies, but it regained importance following the recent global financial crisis.

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To date, the currencies that are included in the basket include the US dollar, euro, Japanese yen and the British pound. Should the yuan (or Renminbi as it's also known) be included in the basket, it will be a “pivotal moment” for the Chinese economy, according to experts, via the Financial Times.

Former IMF economist and China mission head Eswar Prasad calls the yuan's inclusion a momentous event in terms of international finance.

“It represents an important step in the [yuan's] ascendancies to the status of a global reserve currency, and will have gradual but significant repercussions in global currency markets and on international capital flows,” Prasad added.

This momentous inclusion, according to ANZ senior economist Raymond Yeung, is also the biggest change to the SDR basket since the euro was created in 1999.

If the yuan becomes inducted into the basket, nearly four decades of reforms will have proved successful, and the currency will be considered by the IMF as a “freely usable” in terms of its convertibility.

Iit would also mean that it will available as an alternative for central banks that tend to use dollars or euros as a reserve currency, and would also help bolster existing trades with China.

However, even if the chinese currency is to be inducted into the IMF's basket, the process would not be completed until September 2016. This will give IMF members an opportunity to respond to the change in the basket's composition.

Experts believe that China will have to meet certain requirements before September next year. Still, the currency's inclusion is a good sign for China's trade.

“China’s global trade dominance, prudent capital account opening, relatively steady currency value, and rising global influence in commodity markets and geopolitics should allow the renminbi’s share [in trade settlement] to rise further,” wrote Robert Minikin, head of Standard Chartered's Asia FX strategy, according to FT.

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