A long road ahead for RMB internationalization

China’s yuan joined the International Monetary Fund’s basket of reserve currencies. The inclusion is a milestone in the government’s campaign for internationalization.

IMF Managing Director Christine Lagarde delivers a speech on the Chinese yuan's inclusion

in the SDR basket at the IMF headquarters in Washington, D.C. on September 30 (XINHUA)

The yuan joins the U.S. Dollar, the Euro, the British Pound and the Japanese Yen in the IMF’s special drawing rights (SDR) basket. China’s yuan attempts to provide an alternative to the dollar prompting estimated inflows of as much as $1 trillion over the next five years.

“The RMB’s (renminbi) inclusion reflects the progress made in reforming China's monetary and foreign exchange systems, acknowledges the advances in liberalizing the infrastructure of its financial markets,” said IMF Managing Director Christine Lagarde.

China's fixed exchange rate, commodities trade surplus, and foreign direct investments underpin the yuan’s stability. But Capital Economics argue Chinese overheated housing market may lead to financial crisis. More than 60 percent of the total loans covered mortgages this year in China.

Capital Economics said inclusion of the currency in the IMF’s SDR basket would have minimal impact on foreign demand for yuan assets. Joining the SDR was the first China’s step to become an international currency.

The Chinese RMB constituted 1.1 percent of official reserves in the latest IMF survey, compared with 63.7 percent for the dollar.