The renminbi could be adopted into the special drawing rights (SDR) of the International Monetary Fund (IMF) by 2015 if current trends in reserves management continue, according to Gary Smith, global head of official institutions at BNP Paribas.
"The renminbi would not qualify using existing criteria, but the IMF is looking at the criteria, and the renminbi might be included in the next weighting in 2015 if not before, if current trends continue," said Smith, who was speaking as a panellist on a Central Banking On Air debate Should reserve managers invest more in emerging markets? broadcast today.
His view was partly endorsed by fellow panellists Ulrik Walther, head of sovereign institutions at Pyramis Global Advisors. "It's inevitable that the renminbi will be included in the SDR," said Walther, but he did not provide a timeline for its inclusion.
While there was broad agreement among the panellists that reserve mangers would continue to diversify into emerging market currencies, including the renminbi, there were divergent views on the scale and extent of this diversification.
David Smart, global head of sovereign funds at Franklin Templeton Investments, said that 5% would serve as the minimum holdings in emerging market currencies, but that if current trends continue this was likely to increase. "Central banks are sitting on money that is far in excess of their requirements," said Smart. "This means that the liquidity aspect of reserve management, which is the big advantage of the US bonds, is less important. We have seen reserve managers create [separate] investment pools, which is part of the shift towards return."
the renminbi might be included in the next weighting in 2015 if not before, if current trends continue
But Walther advocated matching reserve allocations broadly to trade ties. He warned reserve managers, which are struggling to generate returns from low-yielding US Treasuries, not to switch to emerging market assets purely in a bid for yield. He said it would be a cause of concern "if reserve managers allocate to emerging markets purely from a return perspective, rather than from a trade perspective".
But Smith also pointed out that the perceptions about the relative riskiness between traditional reserve currencies and emerging market currencies is converging. "At the same time as the traditional markets, such as the US and some European government markets, have become less attractive, emerging markets have become more attractive," he said.