The renminbi in focus: reserve managers see promise

Reserve managers see potential in the renminbi and expect the International Monetary Fund to increase its weighting at the next special drawing rights reassessment

Special drawing rights (SDR) are supplementary foreign exchange reserve assets created, defined and maintained by the International Monetary Fund (IMF) since 1969, and their value initially expressed in terms of gold. Following the end of the Bretton Woods system in 1971, the SDR’s composition changed to include currencies of countries with the largest shares of exports of goods and services. 

On October 1, 2016, the IMF’s SDR was broadened to include the renminbi (RMB) as its fifth currency, its inclusion a signal that China had entered the world economic stage. Five years on from its inclusion, has RMB continued to gain traction in international markets? 

In early July, Central Banking spoke to five policy-makers: Zafar Parker at the South African Reserve Bank (Sarb), Kimty Kormoly at the National Bank of Cambodia, Robert Rekasi at the Central Bank of Hungary, Diego Gianelli at the Central Bank of Chile and Mohamed Araar at the Central Bank of Tunisia, about the prominence of RMB within central bank reserves following its inclusion in the SDR.

A rise to prominence

RMB has seen an increase in its international currency functions as it became an avenue for greater reserve currency diversification. RMB’s market share as an international reserve currency has, as a result, risen to a record high. 

According to the IMF’s Currency composition of official FX reserves survey, as of the first quarter of 2021, RMB assets’ share of the official FX reserves of central banks rose to 2.45% ($287.48 billion). At the end of 2016, when the IMF began reporting RMB reserve assets, the currency only accounted for 1.07% of total reserves. The increasing share of RMB allocation in central banks’ official reserves shows that RMB is now more widely accepted, and interests in RMB assets continue to rise.

All five policy-makers agreed that the IMF had made the right decision to include RMB in the SDR basket five years ago. Parker and Rekasi shared the view that including a currency from the fast-growing emerging market economies provided a better representation of the global macroeconomic and financial system. At the same time, the inclusion of RMB helped to further open up China’s capital markets.

RMB’s inclusion in the SDR has highlighted its significance for the global financial system’s development over the years. The use of RMB in cross-border payments has grown rapidly. According to a Swift report in May 2021, RMB was the fifth most active currency for domestic and international payments by value, with a share of 1.9%. However, given the very large volume of trade and investment between China and other countries during the same and preceding periods, the global market share of payments in RMB has been disproportionately low. Moreover, RMB FX trading volumes have increased significantly. According to the Bank for International Settlements, as of April 2019, RMB average daily trading volumes were $284 billion, up 41% compared with April 2016. RMB FX trading was mostly conducted in Hong Kong, London and Singapore, contributing almost 60% of global RMB FX trading volumes.

Boosting development

RMB’s inclusion in the SDR has also been important for the development of the global financial system and has led to a more stable financial market, said Kormoly and Araar. “RMB has shown its importance in both trades and investment activities”, added Gianelli. 

RMB is soon to undergo its first reassessment since joining the SDR basket. The majority view tended to agree to an increase in RMB’s weight in the upcoming reassessment, due mid-2022. Gianelli stated that the participation of China in the global trade market was around 15%, the participation of RMB in the global fixed income markets around 20%, but the current RMB’s weight was only 11%. As a result, he expects RMB would increase, or at least keep, its current weight. 

Parker and Kormoly expect RMB’s weight will increase gradually over time, given RMB has made progress in terms of internationalisation. It has also had a positive influence on the global economy, with the increased use of RMB in cross-border payments, settlements, trade financing, bond issuance and trading.   Araar believes the continued inclusion of RMB within the SDR reinforces that the currency is stable in value. However, Rekasi held a more conservative view: “Evaluating the trends of world trade, which could be a driver of weight changes, during the Covid-related economic stress, can be challenging.” 

Increased interest

Since Chinese bonds were included in the FTSE World Government Bond Index in March 2021, they have been included in another three major international bond indexes. The accumulated net increase in foreign institutions’ RMB bonds holdings in the first half of 2021 reached CNY462.8 billion. As of June 2021, foreign holdings in Chinese bonds reached CNY3.72 trillion in total, an increase of 48.3% compared with June 2020. However, Chinese bonds still only account for 3.5% of total bonds holdings. 

International investors’ participation in the Chinese bond market has steadily increased, and foreign investors continue to increase their RMB bond holdings. Although the China-US interest rate spread has narrowed slightly since the end of 2020, Chinese bonds remain relatively stable compared with assets of other countries. Factors such as increasing attractiveness of RMB assets and relatively high yields have further boosted the confidence of international investors in Chinese bonds. It is expected there is still huge potential for a substantial increase in the proportion of foreign capital in Chinese bonds holdings.  

In recent years, the People’s Bank of China and several Chinese government ministries issued a number of policies on cross-border RMB usage and investment of onshore financial markets, highlighting the importance and support of the Chinese government to the continuing internationalisation of RMB. This support has helped expand the scale and depth of offshore RMB markets.

The opening-up of China’s financial sector is also an essential element of RMB internationalisation, but the extent to which the opening of China’s bond market has aided RMB internationalisation hinges on several factors. Sarb noticed an increasing appetite from emerging market central banks considering investing in the China onshore bond market. This was as a result of a simplified investment process, improved regulatory transparency and increased operational support, Parker said. As a result, he believes the opening up of China’s bond market will lead to higher RMB allocations worldwide.  

Rekasi and Gianelli consider that the increase in participation of foreign investors in China’s bond market will increase support for RMB exchange rate and enhance the operations of China’s onshore bond market. Kormoly and Araar believe the opening up will facilitate a more market-based RMB exchange rate and will enhance internationalisation further.

Growing pains

RMB’s biggest growth challenges, according to the policy-makers, are infrastructure and procedures, which were identified as some of the main problems investors face when investing in China’s onshore market. Parker said the biggest challenge towards RMB’s growth related to the uniqueness of the country’s bond market structure, in particular trading procedures and wide bid/offer bond spreads. 

Gianelli said some infrastructure issues needed to be addressed. He noted the US dollar was still very “predominant” worldwide and, for that reason, a change in paradigm would probably take some time. Araar said the management of FX reserves was the biggest challenge faced by China given the large proportion of US dollar holdings compared with RMB. He suggested China might need to introduce policies to encourage other sovereigns to include RMB in their reserves.

RMB internationalisation has entered a new period of opportunity. Offshore markets are more willing to accept and use RMB, while overseas central banks and institutional investors continue to increase their RMB assets holdings. China has been actively positioning itself for continued internationalisation with the People’s Bank of China and other government authorities, jointly introducing new policies and measures to promote cross-border RMB businesses and investments in the capital market. This has helped accelerate the opening up of the onshore bond market and integrated China’s markets into the global financial system further.

 

This feature forms part of the Central Banking focus report, The renminbi’s rise to prominence

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