Date
28 May 2017
An IMF endorsement of the renminbi may mean nothing much until China can lift capital controls and improve its opaque markets, analysts say. Photo: Bloomberg
An IMF endorsement of the renminbi may mean nothing much until China can lift capital controls and improve its opaque markets, analysts say. Photo: Bloomberg

Yuan IMF reserve nod either worth US$1 tln or just symbolic

The International Monetary Fund’s designation of the renminbi as its fifth reserve currency will be either worth more than US$1 trillion in fund inflows or little more than symbolic, depending on how quickly China opens its markets, Bloomberg News said.

The IMF will need to conclude that the Chinese currency is “freely usable” for it to win entry in a review of the institution’s Special Drawing Rights basket this month.

Standard Chartered Plc predicts the endorsement will draw between 4 trillion yuan (US$628 billion) and 7 trillion yuan of funds over five years, up to half of which will come from reserve managers and the rest from private investors.

But Daiwa Capital Markets believes that until reforms make more progress, entry will be “almost irrelevant”.

Fund managers may favor currencies such as the Swiss franc and the Aussie dollar until China can lift capital controls and improve its opaque and relatively illiquid markets.

In the Communist Party’s development plan for the next five years, President Xi Jinping pledged to boost yuan convertibility and open up the financial industry to win SDR inclusion.

Yet caution may prevail after a shock yuan devaluation in August triggered a record exodus of funds, amid a slowing economy and a volatile stock market.

“We believe the market’s confidence in the yuan will grow because of SDR, but this is a medium- to long-term process,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co.

“It depends on China’s economic fundamentals and the progress of financial-market reforms, such as the diversity and liquidity of products. The infrastructure must be built well.”

IMF representatives have told China that the yuan is likely to enter the basket soon, Chinese officials with knowledge of the matter said in October.

SDRs, which amounted to about US$280 billion globally as of September, are claims that can be converted into any of the basket’s currencies.

Optimists say the endorsement will bolster the case for official and private managers to buy Chinese debt.

Deutsche Bank AG predicts up to 4 trillion yuan of inflows while AXA Investment Managers sees US$600 billion.

This compares to about 44 trillion yuan of outstanding Chinese onshore bonds, fewer than 2 percent of which are held by overseas investors.

With such a low base and further easing of limits on foreign buying, Goldman Sachs Group Inc. projects overseas investors could pour US$1 trillion into Chinese debt in the “coming years”.

Swissquote Bank SA expects the yuan to rise to 6.25 a dollar by June 30 on the SDR inclusion.

Other banks are less bullish, with HSBC Holdings Plc and Standard Chartered predicting it will end the year at 6.5, weaker than Thursday’s closing price of 6.3692 in Shanghai.

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RA/CG

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