IMF approves China's yuan for reserve currency status

China's yuan currency has been approved by the International Monetary Fund for addition to its exclusive basket of reserve currencies, which some analysts think will add a further pressure on commodities.

The IMF said the renminbi would be added to its Special Drawing Rights (SDR) basket from 1 October 2016, joining the pound, euro, US dollar and yen.

The Washington-based organisation did not specify the weighting the yuan would be given, though it later emerged that the dollar weighting would be 41.73%, with the euro at 30.93%, yuan at 10.92%, yen at 8.33% and sterling at 8.09%.

IMF managing director Christine Lagarde said the addition of the currency recognised China's reforms of its monetary and financial systems, and reflected the huge use of the currency in international trade and the fact its flexibility had increased.

A statement from the IMF said its board had decided that the RMB met all existing criteria and by next October was "determined to be a freely usable currency".

"Launching the new SDR basket on October 1, 2016 will provide sufficient lead time for the Fund, its members and other SDR users to adjust to these changes."

In August, China sent shockwaves through the currency and equity markets when it devalued the renminbi by the largest amount on record and announced it would allow the currency rate more freedom to be moved by the market.

The People's Bank of China slashed the renminbi’s daily fixed rate to the dollar and said it would allow the currency to depreciate by 2%, at which point it would allow the market to play a bigger role in setting the currency rate.

Analysts suggested the addition of the yuan could possibly foreshadow further weakness in the currency as, to be successful, the yuan would have to meet a strict set of criteria that only the pound, euro, dollar and yen have so far been able to achieve.

"Following the successful SDR inclusion, China may further loosen its grip on the CNY and allow material currency depreciation over the coming year. We remain long USD/CNY via call spreads," economists at Barclays said in a research note sent to clients last week.

In recent weeks other analysts, such as those at Bank of America-Merrill Lynch, have forecast the yuan will weaken in 2016 by more than financial markets were discounting, which might weigh on the commodity space, including copper and oil futures.