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16 Nov 2015
China: Macro implications of SDR approval for RMB – Deutsche Bank
FXStreet (Delhi) – Research Team at Deutsche Bank, notes that in a recommendation to the IMF's Executive Board on Friday (Nov 13th), its staff proposed that the Board include the RMB in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar.
Key Quotes
“The IMF Board will discuss the case of RMB on Nov 30. We expect its inclusion will be approved, though the actual inclusion may take place on October 1 2016, as suggested by the IMF staff in their SDR report on July 16 2015.”
“The most important implication of the SDR inclusion is the potential boost for reforms in China. The progress of structural reforms in China has been slow with the exception of financial reforms. The development in the equity market this year has led to concerns among some investors if the government is committed to market oriented reforms.”
“The SDR inclusion is a victory of the reformers in the government. It may help to boost the momentum for further reforms, which are much needed for the economy. The SDR inclusion will also help to strengthen confidence in the RMB exchange rate. While the inclusion itself may not generate meaningful capital inflows in the next 6 months, it is likely to attract structural inflows from central banks and sovereign wealth funds in coming years. Such inflows may help to stabilize expectation in the market.”
“The next challenge for the Chinese authorities is to make its domestic bond market attractive to foreign investors. For RMB assets to be taken as a practical choice for reserve management by global central banks, the RMB bond market needs to become more liquid and transparent. Infrastructure needs to be set up, to facilitate foreign investors to participate. This will take time.”
“The SDR inclusion serves as a catalyst for such development to accelerate. We maintain our view that the Chinese government will not allow sharp RMB depreciation in the rest of the year. As the market expectation for December rate hike heightens, RMB depreciation would cause high volatility in the financial market which is damaging to China's economy. We believe the PBoC may want to wait for the Fed to hike rate first and see how risks in the emerging markets evolve, before it takes the next move on the exchange rate.”
Key Quotes
“The IMF Board will discuss the case of RMB on Nov 30. We expect its inclusion will be approved, though the actual inclusion may take place on October 1 2016, as suggested by the IMF staff in their SDR report on July 16 2015.”
“The most important implication of the SDR inclusion is the potential boost for reforms in China. The progress of structural reforms in China has been slow with the exception of financial reforms. The development in the equity market this year has led to concerns among some investors if the government is committed to market oriented reforms.”
“The SDR inclusion is a victory of the reformers in the government. It may help to boost the momentum for further reforms, which are much needed for the economy. The SDR inclusion will also help to strengthen confidence in the RMB exchange rate. While the inclusion itself may not generate meaningful capital inflows in the next 6 months, it is likely to attract structural inflows from central banks and sovereign wealth funds in coming years. Such inflows may help to stabilize expectation in the market.”
“The next challenge for the Chinese authorities is to make its domestic bond market attractive to foreign investors. For RMB assets to be taken as a practical choice for reserve management by global central banks, the RMB bond market needs to become more liquid and transparent. Infrastructure needs to be set up, to facilitate foreign investors to participate. This will take time.”
“The SDR inclusion serves as a catalyst for such development to accelerate. We maintain our view that the Chinese government will not allow sharp RMB depreciation in the rest of the year. As the market expectation for December rate hike heightens, RMB depreciation would cause high volatility in the financial market which is damaging to China's economy. We believe the PBoC may want to wait for the Fed to hike rate first and see how risks in the emerging markets evolve, before it takes the next move on the exchange rate.”