China's Renminbi Is Now Officially A Reserve Currency - Investment Houses React

Tom Burroughes

5 October 2016

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 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.