- 2018-12-11
RMB into the basket
Finally, the renminbi has joined the International Monetary Fund (IMF) Special Drawing Rights (SDR) basket. Before this term, the term seldom became the focus of news. The reason why this matter has attracted a lot of attention is that many people regard it as an recognition of China's status as a world economic power. The renminbi is the first emerging market currency included in this elite currency basket and the first new member of the SDR in the past 50 years. Joining the SDR has always been the goal that China has been pursuing, but it is still basically symbolic in financial sense. It will take decades for the renminbi to become a major international currency.
Given the weight of China’s economy in the global economy, the inclusion of the renminbi in the reserve currency basket—joining the U.S. dollar, euro, yen, and pound sterling—seems logically, and it may be regarded as a gift from Western financial powers, but This gift also carries a heavy burden, which may make Beijing regret it. According to the IMF's compliance regulations, new entrants must meet two conditions. The candidate must be a major trading country, which is clearly satisfied by China. In addition, the candidate's currency must be "freely usable." Article 2 was originally understood as "freely convertible or tradeable." If interpreted as such, the renminbi would not be eligible because China has extensive capital controls. However, the explanation given by the IMF is that “freely useable” refers to the wide application in international transactions. In view of the use of RMB in trade financing, currency swaps, and foreign exchange transactions, the second condition is also met.
The willingness of major powers to support the renminbi to join the SDR seems unexpected. After all, they have adopted a harsh approach to China in the past on global economic issues, including requiring China to abide by the guidelines of the World Trade Organization (WTO). But this is not really a concession, because their ultimate goal is to include the renminbi in the SDR as a means to promote more market reforms in China, especially to improve its domestic financial market and eliminate its capital controls.
During this period, unless the renminbi becomes more accessible globally, the IMF's principle that the renminbi should meet the "freely usable" conditions will not have much impact. But people still lack understanding of how difficult it is for a currency to become easily available in the global financial system. The United States has achieved this by running a huge trade deficit and paying for it in U.S. dollars, and the U.S. has also provided U.S. dollars through aid programs. China does not want to replace its trade surplus with a trade deficit, and it is not logical for a developing country to donate capital to richer countries. The only option left for Beijing is to open the capital market more fully to external borrowers so that they can buy renminbi. For China's relatively underdeveloped and imperfectly regulated market, doing so is likely to increase volatility and risks.
Promoting the development of the renminbi as an international currency means that it will be much more difficult for Beijing to meet the needs of more recent growth and stability. Letting the renminbi play the role of an international currency—which means staying strong and stable—is in conflict with allowing market forces to determine exchange rates in response to cyclical changes. The authorities cannot have both, unless they adopt different methods to manage exchange rate adjustments.
The main challenge now is to maintain a certain degree of exchange rate stability while allowing market forces to work. China currently seems to be trapped in a no man's land. If Beijing allows the renminbi to depreciate significantly, it is likely to be criticized by the United States, which still believes that the value of the renminbi is undervalued. And China will be blamed by neighboring countries, which will think that China is carrying out a competitive currency devaluation in order to maintain its trade advantage. However, in view of the correlation between the RMB exchange rate and the US dollar, most market observers outside the United States believe that the value of the RMB is overvalued. Reasons include the large-scale depreciation of the currencies of its major Asian trading partners and as Chinese investors seek to diversify their investments. Capital outflow is likely to continue.
But there is still a way to achieve the goal of expanding the use of the renminbi abroad, while at the same time turning the renminbi into a more market-based volatility. This method is to focus more on regional trade and investment models. Nearly half of China's trade is related to processing, including parts imported from other East Asian countries, assembled in China and sold to the West. The closeness of the currencies of some Asian countries to the renminbi has exceeded the relationship with the US dollar, which means that the renminbi can be used as a "reference currency." Asia as a whole will benefit from the wider use of the renminbi, thereby improving trade efficiency and reducing the exchange rate risk of intra-regional trade.
As a reference currency, the renminbi should break away from its close relationship with the US dollar and be more consistent with the trends of Asian currencies. This may cause some depreciation, but it should be done step by step and through more flexible exchange rate adjustments, rather than accidentally promoting large-scale adjustments in just a few days. As a result, the RMB trend will be more stable relative to the currencies of China's major trading partners in Asia, and will be more flexible relative to the US dollar.
Shaping a new international monetary order
The rise of China poses a huge and fundamental challenge to the global financial order. For decades, the arbiter of the global monetary system has been developed Western democracies, their currencies are freely convertible, and their open capital markets are governed by the rule of law.
And China is different from them in every respect. China is a developing country, and the ruling Communist Party has been working hard to limit its freedom of currency exchange and protect its domestic capital market from foreign capital and influence.
Therefore, the International Monetary Fund's (IMF) decision to include the renminbi in its elite reserve currency basket represents a potentially critical moment. Eswar Prasad, a former IMF economist and head of the China Department, called this a "significant event in the history of international finance". He also said: "This represents an important move for the RMB to become a global reserve currency. This step will have a gradual but significant impact on the global currency market and international capital flows."
However, the inclusion of the renminbi in the IMF's Special Drawing Rights (SDR) currency basket is only one of the manifestations of the currency's growing influence outside China. "Red banknotes" have become an increasingly important trade settlement currency, a store of value, and an investment tool for China's economic assets.
Judging from all the above factors, 2015 has become a landmark year for the renminbi. Although the renminbi unexpectedly depreciated in August and the slowdown in China’s economic growth has also caused various concerns, the renminbi has surpassed the yen to become the world’s fourth most commonly used payment currency. According to payment service provider Swift, the renminbi accounted for 2.34% of global payments in July and rose to 2.79% in August, higher than the 2.76% of yen.
The renminbi currently accounts for 24.6% of China’s own trade settlements. The investment bank Standard Chartered predicts that this proportion will rise to 38% by 2017 and 46% by 2020. For those investors who are approved by the Chinese government, the main benefit of holding RMB is that they can gain access to China's domestic bond market, which often has yields that are several percentage points higher than that of European and American markets. According to official statistics, at the end of 2014, overseas fund companies held 713 billion yuan of Chinese domestic bonds, an increase of 78% year-on-year. This figure is not large compared with the overall scale of China's bond market, but it is already very large compared with the total capital of other regional local currency bond markets.
Beijing remains cautious about which foreign institutions can invest in the domestic market. It only allows central banks, sovereign wealth funds, multilateral organizations and other carefully selected institutions to enter its interbank bond market. Similarly, the Chinese stock market still prohibits the full participation of foreign institutions, only granting limited participation quotas to approximately 320 institutional investors deemed "qualified" by it.
Paul Mackel, head of the global emerging market foreign exchange research department of HSBC, said that joining the SDR should not only eliminate certain concerns about the stability and liquidity of the renminbi, it would also encourage Beijing to continue Foreign institutions open up domestic capital markets.
This process, in turn, should persuade central banks to increase the proportion of RMB holdings in their foreign exchange reserves. Markle said that although the weight of the renminbi in the SDR currency basket may be 14%, which means that the weight of the yen may drop to about 8% (the latest IMF announced the weight of the renminbi is 10.92%-editor's note), by 2025, Approximately 10% of the foreign exchange reserves of central banks may consist of RMB.
If all this happens, it will solve the current imbalance of international finance to some extent, that is, the share of RMB in global central bank reserves is less than 1%, even though China accounts for 13% of the global economy and more than 15% of world trade. . Given that China is the largest trading partner of 120 countries, it is reasonable to expect that the central banks of these countries will be eager to increase their holdings of renminbi.
However, these developments have not concealed the fact that among the currencies in the SDR currency basket, the renminbi is somewhat different. The key criteria for the IMF's SDR inclusion is that the renminbi should be "freely usable", a definition that is lower than the "fully convertible" currency standards met by the U.S. dollar, euro, pound sterling and yen.
David Lubin, Citi's head of emerging market economics, pointed out that Beijing does not intend to make the yuan fully convertible. Zhou Xiaochuan, Governor of the People’s Bank of China, defined the goal as “managed free convertibility” and made it clear that “the capital account convertibility that China is trying to find opportunities to achieve is no longer based on the traditional concept of complete or free convertibility.” .
Lubin said that in fact, China hopes to retain the discretionary right to restrict the inflow of speculative capital, thereby restricting capital activities to deal with problems in the balance of payments.
In a recent commentary for this newspaper, Lubin said: "Over time, what China wants to do is to gently reaffirm the role of the Chinese government in shaping the international monetary order."