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Saturday, May 30, 2015

Renminbi goes global, 30 MAY

Paul Mackel, Head of FX Research, Asia-Pacific, HSBC
China aims for currency’s inclusion in IMF Special Drawing Rights basket

China’s currency is coming of age. Beijing is promoting the internationalisation of the renminbi with the aim of it being included in the IMF’s Special Drawing Rights basket.

The renminbi faces both cyclical and structural forces. On a cyclical front, policymakers are easing monetary policy to support growth, but on a structural front, they are promoting reforms aimed at improving the quality of growth and internationalising the currency.

The calming of the dollar’s bull-run is making both cyclical easing and structural reform more palatable in the near term. But it is in China's interest anyway to front-load such measures because of the rapid deceleration in growth and inflation and because the IMF’s review of the SDR basket scheduled for late 2015.

China's leaders have repeatedly committed to keeping the external value of the renminbi broadly stable, despite domestic economic challenges. However, for the currency to be included in the SDR basket, the renminbi needs to become more freely usable – which means a more open capital-account structure and the currency’s increased use for international trade and investment purposes.

By ruling out short-term currency devaluation, policymakers and the private sector are more incentivised to pursue economic and financial reforms to resolve the structural problems of low growth and high debt.

But a stable renminbi over them medium-term is also seen as a pre-requisite for a reserve asset. Gaining SDR status could over time lead to greater use of the renminbi among official reserves managers and eventually even see China become a global lender of last resort. Furthermore, such a national goal could spur greater domestic reforms, as happened with China joining the World Trade Organisation in 2001, when manufacturing and trade opened up and boosted growth.

China is making good progress on these reforms. The past year has seen the initiation of the Shanghai-Hong Kong Stock Connect and rapid expansion of portfolio investment flow schemes. This year, could see the launch of the Shenzhen-Hong Kong Stock Connect, schemes to open the onshore bond market and allow more onshore market access to foreign banks, plus more deregulation for currency transactions in the new free-trade zones in Guangdong, Fujian and Tianjin.

By opening up the capital account and allowing private-capital flows to offset current-account inflows, the central bank can become more hands-off in the currency market over time. When the renminbi becomes more market-oriented and recognised as a reserve asset, the bank will no longer require such a large chest of reserves.

The existing stock of reserves is being deployed into more productive uses such as funding infrastructure projects via the New Development Bank, the Asian Infrastructure Investment Bank and the ‘One belt, One Road’ fund. They could also be used through capital injection to local banks to support domestic lending and debt structuring.

China’s central bank has re-established market confidence in the renminbi via its currency policy and comments. Now, Beijing can also manage the exchange rate by adjusting the pace and order of its capital account liberalisation.

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