Beijing skittish, but market hot for Renminbi’s bid to join IMF’s SDR basket

Is Beijing playing it too safe by listing an SDR inclusion as a target for the next five years?

PUBLISHED : Friday, 06 November, 2015, 1:51pm
UPDATED : Friday, 06 November, 2015, 3:39pm

While some of the world’s biggest banks and fund managers believe the renminbi is almost a shoe in to get into the International Monetary Fund’s elite currency basket this year, Beijing doesn’t seem to feel that inclusion is in the bag.

In the detailed 13th five-year plan released this week after the ruling Communist Party plenum, a brief line caught the attention of Raymond Yeung, senior economist at ANZ.

In the all-encompassing blueprint spanning the next five years, “pushing for the renminbi to join the Special Drawing Rights” has been engraved. Such a goal was not carved into the 12th five-year plan.

“This shows that not even at the top government level is there firm confidence for an inclusion at the review this month. Otherwise, why would they list it as a working item for the next five years?” Yeung said.

The government confession of doubt, albeit crafted in a nuanced manner, stands in stark contrast with the widespread sanguine attitude of the market.

Some of the world’s biggest banks and money managers have upped the decibel level in championing the renminbi’s bid for SDR membership, a synthetic quasi-currency used as the IMF’s account unit and rarely seen in financial transactions.

Standard Chartered Bank said the Chinese currency had a “more than 90 per cent chance”; UBS said it was almost a sure case that the IMF executive board would give its nod on the application. AXA Investment Managers, which overseas some 694 billion euros (HK$5.9 trillion), assigned an 80 per cent chance for inclusion in the November review, 15 per cent for a delay to 2016, and only a 5 per cent chance to miss the cut till 2020.

Amid the market chorus, the IMF has yet to reveal the date on which its executive board will meet and review the basket’s composition, which happens once every five years.

On Wednesday, a report by the mainland’s China Business News said the IMF had delayed the date of the review from November 4th to the 30th. The report prompted the IMF to rebut and reiterated the November time frame to discuss the issue.

“The exact board meeting date will be communicated once it has been set,” the IMF said.

“The IMF has already delayed it once. I wouldn’t be surprised if the day of November 30th slipped through without a decision being announced,” said Yeung.

The IMF in early August delayed the effective date for a potential inclusion from the beginning of 2016 to September 30 of that year.

Joining the SDR, now consisting of the dollar, euro, pound and yen, is viewed as a confidence boost to the yuan’s status as a reserve currency, as well as being acknowledged as“freely usable”, a milestone that would crown Beijing’s long pursuit of internationalising its currency.

Aidan Yao, senior emerging market economist at AXA Investment Managers, estimated that the yuan would be granted a 14 per cent weight in the SDR basket, vaulting past the share of the pound (11.3) and the yen (9.4) and trailing only the dollar (41.9) and euro (37.4).

Marc Chandler, senior vice president for foreign exchange at Brown Brothers Harriman, the oldest private bank in the US, said his hunch was that the renminbi would be given a weight between 5 to 7, just under that of the yen.

“The potential issues arising from the treatment of Hong Kong’s offshore yuan, the CNH, market may speak for a lower weight for the CNY,” he said.

The IMF in its August report said the treatment of Hong Kong and Macau special administrative regions and Taiwan “presents methodological issues for the computation of some indicator”, such as whether transactions between mainland China and the other three regions shall be considered as international.

Nonetheless, Chandler, similar to a lot of other currency and economic experts, thinks that the renminbi has “a good chance to get in”. “It’s a gradual process. First, get into the door, then gradually increase the weight as China’s reserve share grows and [capital market] accessibility is enhanced,” he said.

Yao at AXA estimated that in the most optimistic scenario, some US$600 billion capital will flow into China from supranational, official and private investors between 2016 and 2020, on the condition that the renminbi joins the SDR and that Beijing continues to open up access for private investors.

Some US$40 billion, representing a 14 per cent share of the IMF’s US$280 billion SDR portfolio, will be allocated by the IMF. Another US$360 billion will be snapped up by foreign central banks, assuming that the renminbi accounts for 5 per cent of global reserves by 2020.

Some US$200 billion will be bought by private investors, accounting for a 1 per cent share in the US$20 trillion portfolios around the world that tracks the Citi World Government Bond Index, which Yao used as a proxy for his calculation.

“Such capital inflow will counterbalance the capital outflow we have seen in China over the past year,” he said.