Date
26 May 2017
Renminbi holders expect a relatively stable exchange rate with a reasonable volatility range. Photo: Bloomberg
Renminbi holders expect a relatively stable exchange rate with a reasonable volatility range. Photo: Bloomberg

Don’t get too worked up about renminbi’s SDR inclusion

Many of my friends asked me about the valuation of yuan immediately after its inclusion in the Special Drawing Rights currency basket.

I don’t think it’s a key question to think about for now. The more important thing is the tremendous business opportunity brought by China’s financial reforms.

In the short run, the inclusion will have only limited impact on the exchange rate and the real economy.

The mid-term target, as well as the real meaning of the financial reforms for the 13th Five-Year Plan, is to open the country’s capital account by 2020. And, ultimately, to transform the country’s economy into a consumption-driven one, like that of the United States.

China has nearly 1.4 billion people, more than four times the US population, so there should be more opportunities than difficulties.

Yi Gang, the deputy governor of the People’s Bank of China, said after the International Monetary Fund announcement that there will be no more sudden changes in the renminbi exchange rate like the Aug. 11 move.

To be an international currency, market-oriented mechanism and liquidity are more important than the exchange rate. Renminbi holders expect a relatively stable exchange rate with a reasonable volatility range.

Amid the growing demand for renminbi, would it be profitable to buy some mainland banks with large overseas exposure, or those being clearing banks for offshore renminbi business?

At present, the renminbi accounts for only 1 percent of foreign reserves, and less than 3 percent of international trade. There’s still a long way to go.

Meanwhile, the renminbi business is not exclusive to mainland banks. Competitors emerge from other central banks and supernational banks, like the World Bank, after the mainland capital market was opened.

Investors should take into account the mainland banks’ bad loans and narrowing interest spreads. 

Inclusion of the renminbi in the SDR basket is just one of the steps President Xi Jinping is taking to realize his China Dream. 

I have strong confidence in the mainland’s economic reform initiatives and the government’s outstanding executive ability.

This article appeared in the Hong Kong Economic Journal on Dec. 3.

Translation by Myssie You

[Chinese version中文版]

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MY/DY/CG

head of private banking and trust services at Hang Seng Bank

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