The inclusion by the International Monetary Fund of the renminbi in its special drawing rights basket of currencies is a spur for its enormous potential as an investment currency.
The renminbi is now traded in Hong Kong, Taipei, Singapore, Frankfurt and London — driven by the fact that China is now the world’s biggest exporter, eclipsing the United States, Germany and Japan.
In 2013, only Hong Kong had a Renminbi Qualified Foreign Institutional Investor (RQFII) quota.
Now there are 16 such markets, broadening access to and use of the quota.
At the recent China Development Forum, Bloomberg chairman Peter Grauer noted that an increased international role for the renminbi as an investment currency could act as an accelerator for China’s reform processes, building on the significant progress already made in the reform and opening of its capital markets.
“A challenge for all of us – policymakers and market participants – in China and around the world is to develop the market infrastructure required to underpin the yuan’s new international role,” Grauer said.
The continued internationalization of the renminbi, its growing role as a trade settlement currency and the opening of China’s onshore capital markets are key drivers for the renminbi on its course to one day becoming a global investment currency.
Market players we speak to in global financial centers are starting to appreciate the long view for the renminbi and adjusting their approaches to analysis and decision making regarding the currency.
At a recent event we hosted in London for more than 400 offshore participants in China, changes to the renminbi fixing mechanism and interest rate liberalization were seen as the most interesting moves among China’s recent liberalization initiatives.
Almost three-quarters of participants indicated that more connectivity to China’s trading platforms and systems was important to them, while 60 percent rated internationalization of the renminbi as being of significant interest to them.
In our view, this is an indicator that market participants are moving to a longer-term and more in-depth assessment of the potential and role of the renminbi going forward.
This interest will only increase as global index providers review the inclusion of China in their benchmark indices.
As these proceed, it could open the door to one of the most significant transitions in global asset allocation.
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