According to sources, Chinese policymakers have been evaluating a number of policies including the potential risk of a renminbi devaluation; as concerns over a trade spat remain elevated. According to the article published on Bloomberg yesterday, “Senior Chinese officials are studying a two-pronged analysis of the yuan that was prepared by the government.” The one side examines the effect of using the currency as a trade negotiation tool, while the other evaluates the outcome of a RMB devaluation to counter any potential impact on exports resulting from proposed US trade tariffs. The obvious knee-jerk reactions followed the reports, which saw the RMB immediately depreciate against the dollar yesterday, but the offshore currency eventually closed 0.20% stronger.
On Friday, the People’s Bank of China (PBoC) decided to disclose the components of their trade weighted index for the renminbi (RMB); the China Foreign Exchange Trade System (or CFETS RMB Index). The concept of a trade weighted basket is nothing new, just the disclosure of the composition and weightings. In fact in 2007 we wrote that, “We know from comments made by officials from the People’s Bank of China, that the central bank manages
As we have expected for some time, the renminbi (RMB) is now odds on favourite to be the next member of the IMF SDR basket. We believe the decision was, unofficially, made months ago and the delay to the vote was indeed just to allow time for the Chinese to put the required criteria in place.
The fact that the IMF delayed their decision until the end of this month, when the board of members vote, has also given members time to air their support, i.e. the UK, US and Europe. Japan has some domestic issues to resolve while they are in their second recession since Abenomics and his quiver full of economic arrows. We look for RMB inclusion as soon as September next year, effective 1st October.
In the key findings of the report the US Department of Treasury did not hold back on the difficulties the US economy is facing with regards to global growth or the impact of a strong dollar on the domestic economy or the fact that other economies should be doing more to promote growth. Its reads;
The Chinese renminbi is now the 4th most active global payment currency according to yesterday’s SWIFT report titled, “Renminbi's Stellar Ascension: Are You On Top Of It?” The renminbi, reaching a record high of 2.79% of global payments, overtook the yen by a slim margin of 0.03%. The US dollar, euro and sterling still dominate the top 3 positions accounting for 44.8%,27.2% and 8.5% respectively so the renminbi is expected to hold around this position for a while having jumped 3 positions in the past year and another 5 in the 12 months prior to that. Following this trend it is certainly conceivable for the renminbi to overtake sterling around 2020 and catch-up with the euro within a decade.
The article in yesterday’s FT was a good assessment of where China stands in its campaign to achieve reserve currency status for the renminbi (RMB). Of particular note is that the US has given conditional support for inclusion of the RMB in the SDR basket, with the conditions merely being that the currency meets the technical requirements.
The article correctly states that the essence of the technical issues is whether central banks around the world can get access to RMB in a timely and relatively costless manner. In simple terms, the point of the Special Drawing Rights (SDR) basket is for central banks to be able to access 'hard' currencies in times of stress. Think of emerging countries that need to have ready access to US dollars, or another of the hard currencies, so domestic companies can pay their debts. The SDR serves the same purpose, except that it is broader and includes currencies, namely the US dollar, Japanese yen, euro and sterling, which are freely exchangeable amongst themselves at minimal cost.