China’s RMB on the world stage, now & tomorrow

China’s RMB on the world stage, now & tomorrow

Michelle Zhu
30/09/16, 10:35 am

SINGAPORE (Sept 30): Starting Saturday Oct 1, China’s currency will be included in the International Monetary Fund’s (IMF) official foreign exchange reserves database.

This comes nearly a year after the organisation gave the nod on Nov 30, 2015, for the renminbi (RMB) to join the US dollar, the euro, the pound sterling and the Japanese yen in its Special Drawing Rights (SDR) basket.

(See also: Yuan IMF reserves entry seen as more symbolic than game-changing)

Guy Harvey-Samuel, CEO of HSBC Singapore, declares the move as a “harbinger of the Chinese yuan’s elevation onto the world stage”, and a “clear recognition of its development as a global medium of exchange”.

Rising role among central banks
“Whilst SDR inclusion does not automatically translate into reserve-currency status, its role within central banks is becoming more pronounced,” says Harvey-Samuel.

He highlights how HSBC’s latest annual Reserve Management Trend survey reflects a 10-fold increase in central banks that are now investing in the RMB since 2012 to 32. The study also projects that the currency’s share of global reserves is expected to rise to 7% in 2020 and to 10% in 2025.

“The RMB’s inclusion has also reignited market interest in SDR-denominated instruments: the World Bank recently issued an SDR bond in China that was settled in CNY,” says the CEO. “In the long run, this will help to enhance the role of the SDR in the international monetary system.”

What the inclusion means for Singapore
Harvey-Samuel believes the resulting boost in confidence and long-term demand for the RMB is likely to further improve the currency’s liquidity and stability in Singapore.

(See also: MAS to count renminbi investments as part of official foreign reserves)

“Already a RMB stronghold, Singaporean businesses’ ability to tap into a deeper pool of liquidity will have a positive multiplier in their ability to capture future inbound Chinese investment, including those linked to China’s Belt and Road initiative,” he asserts.  

Next step for the RMB
Meanwhile, Paul Mackel, HSBC Global Research’s head of emerging markets (EM) foreign exchange (forex) research, says the onshore-offshore basis in the USD-RMB’s forwards are in focus again.

In a Thursday report, he notes that there has been high volatility in the China Offshore Spot (CNH) forex forwards/swaps market, with “sharp divergence” between the onshore-offshore curves although the onshore USD-China Renminbi (CNY) spot exchange rate has been “more or less stable” in Q3.   

This could be a source of concern for the IMF, official investors and other foreign ‘real money’ investors, he adds.

“In our view, the next round of capital account/forex reform measures will likely address this issue, for example by granting onshore banks greater access to the offshore CNH market, and vice-versa,” adds the head of research.  

In his opinion, policy makers are more likely to focus on the insufficient onshore-offshore arbitrage activity now that the RMB’s SDR implementation is soon out of the way.   

“The next big step for the RMB is improving the circulation of it between the onshore and offshore markets. It’s more about seeking better convergence between CNY and CNH,” says Mackel.

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