Wealth management firms reflect on what the inclusion of the Chinese currency into a basket operated by the IMF means for China going forward.

China's renminbi is now officially a reserve currency because on 1 October it entered the basket of special drawing rights of the International Monetary Fund, putting it alongside the dollar, euro, yen and UK pound sterling. While not the kind of event that will send any particular tremors around global markets, the significance of the move is that it highlights how far the Asian giant has come in entering the mainstream of capital markets.

Here are some reactions from wealth and asset management firms.

PIMCO: Luke Spajic, head of emerging markets portfolio management for Asia
The IMF’s decision to include the yuan last November made headlines and came in the midst of a tumultuous year for the currency and for China’s financial markets. Relative calm has returned in recent months: the yuan has continued to depreciate against major currencies but in a more gradual and orderly way than the sudden devaluations in August 2015 and early 2016. And China’s stock market has largely recovered from its steep plunge early this year.

Indeed, despite the bumpy road over the past year, the promise held out by the IMF’s decision is gradually being realised: China’s presence in global capital markets is increasing. Earlier this year, China announced that it would open the interbank bond market to foreign investors much sooner than expected.

Chinese equities appear to be on track for inclusion in MSCI’s widely used emerging market equity index over the next year or two. And now that the currency has achieved reserve status, the yuan is likely to be used more widely in international transactions going forward.

Looking at the year ahead, we expect the current trend to continue: more progress on financial market reform amid slowing growth and continued depreciation in the yuan. Our base case calls for GDP growth of about 6.4 per cent in 2016 and 5.75 per cent - 6.25 per cent in 2017, and a gradual decline in the yuan versus the dollar over the next 12 months.

Ashmore: John Dehn, head of research
In years to come it [SDR inclusion] will also be seen as the day the RMB embarked on its long journey to become the world’s pre-eminent global reserve currency. The IMF included the RMB in its SDR basket with a weight of 10.9 per cent. The basket weights of EUR and GBP were reduced to make room for RMB, while the USD and JPY broadly maintained their weights. The UK has already benefited significantly from its gesture to China by securing material Chinese investment in the Hinkley nuclear power plant [in the UK].

The RMB’s inclusion in the SDR is particularly important for central banks, which now have access to a reserve currency, whose integrity is not undermined by QE and where the government in question pays positive nominal and real yields on its bonds. This makes the RMB unique among the SDR currencies. SDR inclusion is only the beginning for the RMB’s journey, however. The real significance of RMB’s SDR inclusion will only become fully apparent as China’s growing economic importance becomes more widely accepted. Size matters in global finance. In particular, financial markets prefer to benchmark themselves against the largest and most liquid markets. This is why, for example, the US Treasury market and the dollar rapidly replaced the UK Gilt and pound sterling as global benchmarks for fixed income and currencies in the interwar years, where the US economy dramatically outpaced the UK economy.

China is now in the process of pulling a similar trick on the US. Chinese growth is likely to eclipse US growth for several decades to come for a number of reasons. It is important that China is reforming, while US productivity is declining sharply, but China also starts out with a much lower level of per capita income and a much higher savings rate. Higher savings means that China’s investment rates and hence her growth rates will be structurally higher, while a lower starting level of per capita income will ensure that the basic forces of economic convergence continue to propel China forward at much greater speed than the very mature US economy. Realistically, China’s per capita GDP will catch up with US per capita GDP sometime between year 2040 and year 2051. This is significant, because China’s population is more than four times larger than that of the US. Hence, when the two countries have the same per capita income the Chinese economy will in fact be more than four times larger than the US economy.

HSBC Global Asset Management
The SDR inclusion may not generate meaningful capital inflows in the near term, although some central banks may increase their RMB profile to diversify their FX reserves. However, the positive impact on structural capital inflows could be significant in the long term. It could lead to a greater use of the RMB in both trade and financial transactions globally, encourage an increase in global asset diversification into RMB assets, and promote RMB internationalisation. In August, the World Bank issued a SDR bond in China, the first such issuance in roughly three decades.

The RMB’s SDR inclusion, opening up of the CIBM [Chinese bond market] and perhaps more importantly, the RMB bond market’s potential inclusion into major global bond indices will further encourage foreign investors to look at this asset class. Although the exact timing of inclusion is difficult to predict, recent developments in the onshore bond market have marked important steps forward towards this goal. Eventual index inclusion would be a major event. Given the large size of the Chinese bond market, its potential weighting in major global bond indices would be very meaningful.