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World

IMF Prepares To Add China's Yuan To List Of Reserve Currencies

KELLY MCEVERS, HOST:

Next year, China's currency, the yuan, also known as the renminbi, will join a short list of the world's elite currencies. The International Monetary Fund today announced plans to include China's currency in its lending reserve. And this is an important step for China. It's a recognition of the country's role as a global economic power. But as NPR's Yuki Noguchi reports, the yuan is still far from being a reserve currency around the world.

YUKI NOGUCHI, BYLINE: The IMF's lending reserves are made up the world's most prominent reserve currencies. That are currently four on that elite list - the U.S. dollar, the euro, the British pound and the Japanese yen. Each one is freely traded, and each represents a country or group of countries with the euro that do a lot of exporting. What's interesting is that the yuan is not a popular reserve currency. It makes up about 1 percent of the money held by the world's central banks. But in recognition of the country's growing significance in international trade and its recent liberalization of its monetary policies, the IMF says its currency now belongs on that list. Christine Lagarde is managing director of the IMF.

CHRISTINE LAGARDE: And it will clearly better represent the international community based on those two criterion of trade and of freely usable currency.

NOGUCHI: The move will likely increase the world's appetite for the yuan but only in the long run, says Nicholas Lardy, a fellow at the Peterson Institute for International Economics.

NICHOLAS LARDY: This is, in effect, kind of a Good Housekeeping Seal of Approval. It doesn't mean you're going to buy the product, but you're more likely to look at it carefully and consider doing that. And I think central banks will begin to accumulate R&B assets very slowly at first but perhaps building over time.

NOGUCHI: Lardy says the move will put pressure on China to liberalize its monetary policy even more. He says the impact on the U.S. will not be felt immediately. Historically, it takes a long time for a new currency to displace incumbents. And the U.S. dollar, the most popular currency, makes up over 60 percent of the world's reserves. Yuan will be added to IMF's reserve currency list next October. Yuki Noguchi, NPR News, Washington. Transcript provided by NPR, Copyright NPR.