On Monday, the Chinese yuan joined one of the most elite clubs on the planet: the International Monetary Fund’s Special Drawing Rights basket of reserve currencies.
CURRENCY OLD WEIGHT NEW WEIGHT U.S. Dollar 41.90% 41.73% Euro 37.40% 30.93% Chinese Yuan – 10.92% Japanese Yen 9.40% 8.33% Pound Sterling 11.30% 8.09%
“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,” Lagarde said in Monday’s statement.
Of course, the IMF could be dead wrong.
“From a practical position, the IMF expects China will have to make its currency more ‘freely tradable’ than it is – which, along with being a ‘major exporter,’ is the other criteria the IMF considers in conferring reserve status on a currency,” Money Morning Capital Wave Strategist Shah Gilani said on Monday. “But there’s a possibility the IMF jumped the gun on this.”
The Chinese Yuan Is a Dangerous Wild Card
“If China lets the yuan adjust to other major currencies by purely market forces, which none of the other reserve currency countries – the U.S., Great Britain, the European Monetary Union, and Japan do – the IMF may get a shock it’s not prepared for. And I mean a major shock,” Gilani said.
We all saw what happened in August. People’s Daily, the Communist party’s mouthpiece, declared Aug. 24 “Black Monday.” The Shanghai Composite closed down 8.5% that day – the benchmark index’s worst single-day fall in eight years.
Full article: Chinese Yuan Could Give the IMF “a Shock It Isn’t Prepared For” (Money Morning)