Market effect of Chinese yuan SDR inclusion likely to be short-term, say Hong Kong analysts

PUBLISHED : Tuesday, 01 December, 2015, 2:51am
UPDATED : Monday, 27 June, 2016, 11:51am

Yuan assets remain an attractive investment option despite the likelihood of greater volatility, says a veteran investor.

"The yuan's inclusion in the International Monetary Fund's elite basket of reserve currencies may lead to more fluctuations in the value of the yuan," said Dr Wilson Chan Fung-cheung, an adjunct professor at City University.

"But you may still get relatively stable returns if you invest in some fixed-income products such as bonds," he said.

"I will continue to hold my yuan assets, given the even more volatile stock market," added Chan, 55, who started investing in yuan assets about 20 years ago.

While he was upbeat, bankers and stock commentators alike warned that the yuan's inclusion would not instantly boost demand for the currency.

The initial impact on the stock market was likely to be limited, many in the financial sector warned.

Swiss bank Credit Suisse noted the inclusion would not directly increase the yuan's share in global reserves because special drawing rights (SDRs) would be used largely between central banks and international institutions.

"SDRs are seldom used in trade or in the financial market," the bank said in a report.

It said reserve managers might increase their allocation of yuan for the purpose of diversification, but they might do it very cautiously and slowly, depending on many conditions.

But Chan said the yuan's one-way rise in recent years was unlikely to continue as the mainland authorities would cease to interfere in the foreign exchange market after inclusion.

Hong Kong investors and savers have been less upbeat about the yuan's continued surge after the mainland authorities cut its value against the US dollar in August. The yuan has fallen about 3 per cent against the greenback so far this year.

Yuan deposits, one of the main types of investment in the currency in the city, are continuing to taper off.

According to statistics released by the Hong Kong Monetary Authority, yuan deposits in the city dropped about 4.6 per cent month on month to 854.3 billion yuan in October.

"Investors should have a long-term strategy," said Louis Tse Ming-kwong, director of VC Brokerage. "The performance of the yuan and mainland shares hinges on China's economy. Any rally in the currency or shares driven by SDR inclusion may be short-lived," he added.