China’s long-held desire to provide an alternative to the U.S. dollar will get a boost on October 1, when the yuan enters the International Monetary Fund’s basket of reserve currencies, placing it alongside the pound, euro, yen and dollar. The yuan’s ascent is a validation of the importance of the world’s second-biggest economy and the work policy makers have done to allow freer access to the nation’s markets
Still, there’s a long way to go. While China’s the biggest trading nation, the yuan is barely used in world markets. Even in U.S.-China trade, just 2.4 percent of all payments by value were conducted in yuan.
The yuan’s inclusion in the Special Drawing Rights (SDR) basket will prompt central banks and fund managers to buy more Chinese assets, with estimates of as much as $1 trillion of inflows in a five-year period. China needs the cash, with its economy growing at the slowest pace in more than two decades.
