(16 June 2015 – China) In the past five years the Renminbi (RMB)’s internationalisation has grown enough to meet the technical requirements for inclusion in the International Monetary Fund (IMF)’s Special Drawing Rights (SDR) basket, according to Standard Chartered.
More than 500 foreign entities, including asset managers, have obtained access to China’s onshore bond market, and official reserve holdings of Chinese yuan (CNY) assets have reached US$70 billion-$120 billion (A$90.7 billion – A$155.5 billion).
The network of People’s Bank of China (PBoC) swap lines, offshore clearing banks and Renminbi Qualified Foreign Institutional Investor (RQFII) quotas spans the globe.
Standard Chartered said that given China’s important role in the global economy, a more accessible currency opens up important new opportunities for investors and corporate treasurers.
“However, there are also potential pitfalls; in foreign exchange markets, for example, liquidity in non-deliverable FX trading is already thinning, and corporates need to prepare for substantially more two-way variability in the USD-CNY cross in the medium term.
“We expect China to achieve its stated goal of “managed convertibility” – a medium-term steady state – by 2018.
“Restrictions on most capital transactions with a genuine economic basis will have been considerably reduced by then, with tight controls likely to be maintained only on short-term flows and those viewed as speculative.”
The PBoC has committed to launching a series of reforms in 2015 to make the RMB more freely useable and bolster the case for the currency’s inclusion in the SDR basket.
Standard Chartered expects this to be followed by a range of new steps over 2016-18 as China makes steady progress toward managed convertibility.
“Renminbi invoicing has grown much faster in recent years than we had expected, and now accounts for 24.6 percent of China’s total merchandise trade.
“We expect this to rise to 38 percent by 2017 and as much as 46 percent by 2020.”
Turning to the broader dimensions of RMB internationalisation; with the IMF holding informal talks on China’s possible inclusion in the SDR basket and its board scheduled to meet on the subject in October, Standard Chartered assigned a 60 percent probability to the CNY’s SDR inclusion this year, as it broadly meets the technical requirements, “with a very high likelihood of inclusion by 2020 at the latest”.
“We also see a strong case for official reserve diversification into Asian currencies – and an exceptionally strong case for reserve allocation to CNY assets.
“China’s markets are deep, its internal and external balances are strong, it has the world’s largest FX reserves, and it is a major trading counterparty.
“Its assets are highly rated, and the currency has a negative correlation to broader asset-market volatility.
“Looking out to 2020, the emergence of new trade corridors and intra-EM trade growth should further boost the CNY’s prospective role as a major reserve currency,” Standard Chartered said.
Standard Chartered’s Robert Minikin, head, Asia FX Strategy, said: “The policy reforms driven by China’s Renminbi internationalisation ambitions still have plenty of momentum.
“Even during the course of writing this report, important reforms have been announced, including new steps towards interest rate liberalisation onshore and new channels for offshore banks to access onshore funding.
“The past five years have seen an enormous amount of positive and exciting development in the Renminbi internationalisation story; we think the future narrative will prove even more compelling,” Minikin said.