The yuan is the base unit of a number of Chinese currencies, and usually refers to the primary unit of account of the renminbi, the currency of the People’s Republic of China.

China has historically pegged the yuan to a basket of currencies filled mostly with the U.S. dollar. It kept the yuan’s value in a 2% trading band around a “reference rate” that tracked the dollar’s value. That was around 6.25 yuan to the dollar. In other words, one dollar could be exchanged for 6.25 Chinese yuan.

On August 11, 2015, China modified its policy to allow the yuan to trade independent of the US dollar. Why is China changing its policy? On November 30, 2015, the International Monetary Fund (IMF) added the yuan to the world’s official reserve currencies. That also includes the U.S. dollar, the euro, the yen and the British pound. As a condition of receiving foreign exchange reserve currency status, the IMF required that China manage the yuan as central banks in most rich economies do their currencies, by letting market forces determine their value. In bringing the yuan into the SDR, the IMF had to determine that it is “freely usable”. Before coming to this decision, the IMF asked China to make changes to its currency regime.

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