Cash & Liquidity Management
Published 4 MIN READ
Please note: this article is over 5 years old. If you feel this article is inaccurate or contains errors get in-touch here . Many thanks, TMI

Renminbi Added to the SDR

by Vina Cheung, Global Head of RMB Internationalisation, HSBC

Vina CheungThe inclusion in December of the renminbi into the Special Drawing Rights (SDRs), a reserve asset managed by the International Monetary Fund, is a major milestone in China’s mission to globalise its currency. The decision has been a long time coming, and has effectively granted the status of global reserve currency on to the renminbi.

At first glance, it looks like the kind of development that should be of primary interest to central bankers, who will be thinking about how to reallocate their reserves to match more closely the basket of currencies that makes the SDR. With a little reflection however, it should be clear that the move by the IMF is a reminder for companies across the world that the renminbi needs to be part of their business strategy. The renminbi’s newfound status as a reserve asset will, over the medium term, boost demand for the currency among central banks. A recent Bloomberg poll of reserve managers gave a median prediction that 10% of global foreign exchange reserves will be held in the Chinese currency by 2025.

To put this into perspective, there is currently $7.8 trillion worth of reserves globally outside of China. So if such a diversification were to take place today it would require nearly $800 billion to go into renminbi-denominated assets. As countries hold more of their wealth in the renminbi, it gives a powerful sign to businesses that the currency is a viable store of value. The result will be an uptick in companies using the currency to settle international trade.

At the same time, China’s capital outflows are growing rapidly, as local investors diversify into foreign assets. Outbound investment by businesses and individuals is expected to generate $1.5 trillion worth of outflows by 2020. The renminbi will therefore be stuck in the middle of a supply and demand tug of war that is set to increase the level of two-way volatility in its exchange rate. It will be a sharp turnaround from the situation just a few years ago, when the Chinese currency was considered by many to a one-way bet on appreciation.