Date
20 October 2017
While the inclusion of reminibi in the SDR will not bring much immediate impact, banks in Hong Kong are gearing up for long-term opportunities as international demand for the Chinese currency is set to grow. Photo: AFP
While the inclusion of reminibi in the SDR will not bring much immediate impact, banks in Hong Kong are gearing up for long-term opportunities as international demand for the Chinese currency is set to grow. Photo: AFP

What renminbi internationalization means for Hong Kong

On Oct. 1, the International Monetary Fund included the renminbi (RMB) in its Special Drawing Rights (SDR) currency basket.

The impact will take some time to be felt, and there won’t be any game-changing repercussions in the short term.

Nevertheless, it is set to cement Hong Kong’s status as a key offshore RMB center.

The SDR was created by the IMF in 1969 as a supplementary international reserve asset.

The value of the SDR is determined by a basket of currencies. From Oct. 1, 2016, the SDR basket consists of the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the pound sterling.

The RMB has a 10.92 percent weighting in the SDR basket, making it the third-largest behind the US dollar and the euro.

While the initial impact of RMB’s inclusion is limited, banks in Hong Kong have been enhancing related infrastructure such as clearing systems to prepare for long-term opportunities.

Hong Kong already has 12 years of experience in dealing with RMB businesses.

It is the world’s largest offshore RMB market with the most diversified products.

More than half of the offshore RMB capital is parked in Hong Kong, and the city is active in trading the Chinese currency, as well as RMB bonds and derivatives.

As long as Hong Kong continues to take the lead in creating innovative RMB financial products, it will have a bigger role to play as RMB becomes more internationalized.

Currently, the pricing of the RMB is fairly transparent and its market value is gradually converging with official fixing rates.

As the third-largest shareholder of IMF and an SDR issuer, China has the responsibility to keep its foreign exchange policy stable and transparent.

The People’s Bank of China and the State Administration of Foreign Exchange have published foreign exchange reserves data in both US dollar and SDR since April. And IMF will also disclose RMB assets in its official reserve from Oct. 1.

Meanwhile, the Group of 20 major economies and the IMF are discussing ways to widen the use of the SDR, such as by issuing SDR bonds. As such, global demand for RMB will increase in an orderly manner.

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

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

CG

Senior investment banker

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