From next October, the Yuan will join the Euro, the Yen, the Dollar and Sterling as an IMF reserve currency. A reserve currency is regarded as a strong currency, widely used in international trade and that central banks will hold as a component of their foreign exchange reserves. It is perhaps arguable that the Yuan is yet to fulfil the requirement of being widely used in international trade at the moment, but agreements that the Chinese have struck with the UK are designed to boost this in the coming years.

The inclusion of the Yuan as an IMF reserve currency reflects the fact that China has emerged as the world’s second largest economy and therefore plays a major role on the world’s economic stage. Whilst the Yuan has strengthened against other major currencies, this has been on the coat-tails of a strengthening US Dollar that the Yuan has shadowed. The US has long suspected the Chinese of artificially undervaluing the Yuan to ensure that Chinese exports have an advantage in importing markets. If the US were to declare that the Yuan is being manipulated, the US authorities would be forced to take sanctions against the Chinese, so they have always fought shy of making such a declaration. However, all one needs to do is to plot the values of the Yuan, Dollar, Yen, Euro and Sterling on a time chart and the conclusion is inescapable.

The head of the IMF, Christine Lagarde noted that the inclusion was “an important milestone in the integration of the Chinese economy into the global financial system”. China requested that the Yuan be given reserve currency status last year.

It is probable that the Chinese will have to allow the Yuan to trade freely eventually. It is likely to have to appreciate against the US Dollar before it finds its natural value, but that remains a political question for the Chinese as much as an economic one.