IMF adds Chinese Renminbi to SDR Basket: What does it mean?


With the International Monetary Fund (IMF) announcement of the launch of the new Special Drawing Right (SDR) valuation basket including – for the first time – the Chinese Renminbi (RMB), we are pleased to present some comments on what this means from two FX / China experts: Rachael Hoey, Head of Asia at CLS and Dan Marcus, CEO of ParFX.

By virtue of being added to the SDR, the RMB is determined to be a freely usable currency. The RMB is just the fifth currency in the SDR Basket, joining the U.S. Dollar, the Euro, the Japanese Yen, and the British Pound. This also marks the first time since the adoption of the Euro that a currency is added to the basket.

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Rachael Hoey, CLS Asia
Rachael Hoey, CLS Asia

Rachael Hoey, Head of Asia at CLS, comments:

With the inclusion of its currency into the SDR basket, alongside its growing international influence, China is continuing to increase participation in important international financial market systems.  Whilst it is expected that many central banks, among other sovereign investors, would have taken steps to include RMB in reserve allocations, ongoing maintenance of these portfolios will contribute to sustain usage of the yuan.

The expectation is that the continued opening up of cross-border capital flows will drive more international usage of the yuan.  Steps to develop the bond market are supportive of this and continued reform is required to support greater usage of the yuan. China’s FX market will continue to grow, not only to exchange capital across borders but also to ensure effective hedging of FX risk over time.

As this occurs, it is crucial that tried and tested, globally integrated systems are available to sustain growth. The Chinese authorities have embarked on an internationalization program, working closely with critical systems important to the global economy, adopting risk protocols and market infrastructures already hardwired into the global financial ecosystem. These efforts support the adoption of international best practices, making the currency exchange process easier for both domestic and international market participants. Therefore, the ability to manage risk and safely settle renminbi transactions is of the utmost importance.

As China continues its efforts to internationalize the currency and open up the capital account, it is expected that the total RMB international usage will grow as well as its share of the global FX market. However, there are a number of steps that the government and central bank must take in order to attract inbound investment.

Firstly, they must develop deep and liquid domestic financial markets, which includes availability of hedging instruments, to give confidence and broaden its appeal to wider group of market participants. Investors are generally reluctant to make any significant investments in a market if it is too illiquid or does not allow them to enter and exit positions easily.

Secondly, it is imperative that a transparent and consistent legal regime is in place, which is in line with international standards. This will provide investors with the confidence that they will be treated fairly if disputes arise.

Thirdly, and perhaps most importantly, China must evaluate and consider the usage of market infrastructures that provide the risk mitigation and efficiencies necessary to effectively manage and hedge risks with respect to cross border investments. These systems are hardwired into everyday practices by international market participants and CLS is one of them.

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dan-marcus-parfx
Dan Marcus, ParFX

Dan Marcus, CEO of ParFX

The addition of the Chinese renminbi to the IMF’s Special Drawing Rights basket marks a new milestone in its internationalisation and will help promote further international usage.

The renminbi’s role in foreign exchange trading and cross-border payments has surged to such an extent that its growth is now considered by many to be the most significant development in currency markets since the introduction of the euro in 1999.

The Bank for International Settlements (BIS) 2016 FX survey results certainly seem to support this thinking; the Chinese renminbi is the most actively traded emerging market currency, having overtaken the Mexican peso, and is ranked eighth overall. This is an enormous achievement for a currency that wasn’t easily accessible to mainstream investors a decade ago.

With demand and growth set to continue, it became clear to us that trading the renminbi in an environment of genuine interest and firm liquidity is a paramount factor for market participants when deciding where to trade.

In response to market demand, ParFX and its founders introduced USD/CNH in 2015 and it entered the top five traded pairs on the platform within two months.

 

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IMF adds Chinese Renminbi to SDR Basket: What does it mean?

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