Chinese currency, yuan, also known as renminbi has joined the elite club of world’s top currencies with the landmark decision taken by the International Monetary Fund (IMF) to add the currency benchmark basket of SDR currencies on Monday.

The honour paves way for wider use of renminbi in trade and finance besides exalting China’s standing as a global economic power. So far the honour is limited to just four currencies — the dollar, the euro, the pound and the yen, reports New York Times.

"It is a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” Christine Lagarde, the managing director of the IMF said in a statement in Washington.

“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," she added.

Chinese reforms

According to reports, to secure the IMF recognition, China had to reform a lot and also give up its tight control over the currency. In August, China devalued the renminbi, which shook global markets. The action also induced heavy volatility in the country’s economy, which was already facing a slowdown.

According to Sky News report, yuan will have a 10.92 percent share in the IMF currency basket, which was last recast in 2010 with 41.9 percent dollar, 37.4 percent euro, 11.3 percent sterling and 9.4 percent yen.

However, yuan will not be joining until October 2016 and the 11 months ahead will give the IMF managers the required time to prepare for the new composition of currencies.

Prior to yauan’s admission, IMF reworked the formula of eligibility and weightage for various currencies. Under the new norms, euro's share dropped to 30.93 percent. Sterling and yen also shed their weightages, while dollar stayed intact with its previous status.

By qualifying the criteria of "freely usable," yuan is now eligible for use in international payments and can be traded in foreign exchange markets. In the last review by IMF in 2010, those properties were missing in yuan, added the Sky News report.

Another fall out of the IMF entry will be huge spurt in demand for China's currency and renminbi-denominated assets. Most central banks and foreign fund managers will start adjusting their portfolios to bestow the new status to the Chinese currency.

Analysts believe the IMF seal will fuel the demand for yuan more than $US500 billion (AU$694.88 billion) in the coming years as yuan starts expanding its share of global reserve holdings to five percent, edging past Canadian and Australian dollars.

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