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Quick takes update: China yuan's inclusion in IMF's SDR boosts confidence in currency

Tuesday, December 1, 2015 - 08:12
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The International Monetary Fund's (IMF) inclusion of China's yuan into its elite reserve currency basket on Monday, will give greater confidence to companies and institutions around the world to settle trade in yuan and invest in yuan assets, says Peter Wong, deputy chairman and chief executive of HSBC, in a note.

THE International Monetary Fund's (IMF) inclusion of China's yuan into its elite reserve currency basket on Monday, will give greater confidence to companies and institutions around the world to settle trade in yuan and invest in yuan assets, says Peter Wong, deputy chairman and chief executive of HSBC, in a note.

And as a leading yuan centre, Singapore is ideally placed to support China's integration into the global financial system, Mr Wong adds.

The inclusion of the yuan into IMF's Special Drawing Rights (SDR) basket confirms the emergence of the Chinese currency as a reserve currency, which is the ultimate objective of the exchange rate reform, he says.

"The IMF's recognition of RMB's (renminbi) reserve currency status has profound long term implications for the currency's role in the international financial system,'' Mr Wong says.

"Many central banks and reserve managers have already invested in RMB assets and we would expect sovereign investor demand for RMB to continue growing. Inclusion in the SDR basket will also give greater confidence to companies and institutions around the world to settle trade in RMB and invest in RMB assets."

He notes that since the historic process of RMB internationalisation began a decade ago, the mainland authorities have been dedicated to globalising the use of China's currency by encouraging the growth of offshore capital markets, opening up the domestic capital market and liberalising the interest rate mechanism.

Here are other comments:

Chia Woon Khien, senior portfolio manager, Fixed Income:

"The IMF's decision to include the renminbi into the SDR is a major push for the RMB to become one of the world's major reserve currencies. It also accelerates the opening up of China's capital account and signals a significant market opportunity for RMB-denominated assets in the coming years.

"Central banks will increasingly use the RMB for their foreign reserve investments while global investors will allocate more and more to RMB-denominated investments. The longer term implication on the currency front is the tremendous scope for the RMB's long-term appreciation.

"In October 2015, the PBOC started issuing bills in London's interbank market. Moving forward, I believe this will be done on a regular basis. It is highly likely that the MOF will also begin issuing bonds there regularly. With this, you get the money market curve and the entire bond yield curve into international markets. The London market will become the global benchmark for both Chinese issuers outside of China and international issuers tapping into the RMB bond market. In a way, it's like creating the euro yuan market for China."

DBS Group Research:

"Recognized as an international reserve currency, the yuan is well positioned to become more widely used for trade and investment activities in the 'One Belt, One Road', the key development strategy of China's 13th Five Year Plan (2016-2020).

"The yuan will account for 10.92 per cent of the weighting in the new SDR basket. To accommodate the yuan, the weighting of the EUR was reduced most to 30.93 per cent from 37.4 per cent previously, followed by GBP to 8.33 per cent from 11.3 per cent and JPY to 8.09 per cent from 9.4 per cent. The change was minimal for the USD whose weighting was lowered to 41.73 per cent from 41.9 per cent. Coincidentally, these changes were reflected in the yuan's appreciation against the EUR, GBP and JPY in the past month.

"As a global currency, the yuan's depreciation against the USD in November also reflected the monetary policy divergences that lifted the greenback against the other SDR currencies. Having risen to 6.3981 yesterday from 6.3175 on 30 Oct, USD/CNY is seen returning to 6.4124, its highest close this year seen on 25 Aug. Our target for USD/CNY to end 2015 at 6.42 is consistent with our expectation for China to lower its 1Y lending rate to 4.10 per cent this month."

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