The IMF’s decision to include the Chinese renminbi (Rmb) in its Special Drawing Rights (SDR) basket of reserve currencies will boost confidence in the currency, but will have no drastic impact on trade.
From October 1, 2016, the Rmb will effectively become the fifth global reserve currency, as designated by the IMF. The decision confirms its position as a long-term store of value for investors, despite the fact that it is yet to be freely convertible.
The Rmb has been becoming more widely used in trade settlements and it was this week announced that usage between Japan and China more than doubled in the last two years.
However, the IMF ruling’s impact on trade and trade finance is likely to be notional rather than material. The real effect will be long-term and will depend on the government’s continued efforts at liberalisation.
“The reality is this: I don’t think it will have a huge amount of impact on trade. It increases confidence in the same way as the setup of a clearing bank does in another location. From a trade perspective, it’s about continuing to see the development of the Rmb. I don’t expect it to accelerate particularly but it will continue,” Rmb expert Michael Vrontamitis of Standard Chartered tells GTR.
“We believe more than 50% of China’s global trade will be settled in Rmb by 2020,” Qu Hongbin, HSBC
Much fanfare has accompanied the IMF’s decision, but the reality is that even with the inclusion, the Rmb still lags behind the US dollar and the euro in weighting terms (its share of the reserve currency basket).
The US dollar accounts for 41.73% of the SDR basket, with the euro at 30.93%. The Rmb follows on 10.92%, ahead of the Japanese yen on 8.33% and the UK sterling on 8.09%. In some respects, this is representative of the shift in trading power, which has been ongoing since the Chinese government depegged its currency 10 years ago, and since the liberalisation process began in earnest in 2010.
“We made a bold prediction back then that around a third of China’s overall trade would be settled in Rmb by 2015. As of Q3 2015, the Rmb accounted for 31% of China’s total trade settlement. We believe more than 50% of China’s global trade will be settled in Rmb by 2020,” says Qu Hongbin, chief China economist at HSBC.
It’s expected that the currency will be used to finance some of the projects on the One Belt One Road initiative, which has seen a massive pan-continental infrastructure splurge. And in anticipation of the IMF’s decision, around 80 central banks have already been investing in Rmb reserves.
Further reforms around the capital account and state intervention in banking and forex markets are likely to accelerate the currency’s use, as this will eventually lead to convertibility of the Rmb. All of these will ultimately lead to the currency’s wider use in trade finance.
“If that leads to the Rmb stabilising in value and China’s financial reforms continue in a manner that promotes investor confidence, then we may well see the day when the Rmb share of global reserve holdings rivals that of the dollar. When the dollar overtook the pound, a new world economic order took hold. If that day arrives for the Rmb versus the dollar, then it’ll mark another new era,” says Linda Yueh, adjunct professor of economics at the London Business School.