White Collar

More cross-border fund flows needed to maintain momentum of yuan’s internationalisation

Shenzhen stock connect and a fund recognition scheme that works needed in wake of yuan’s inclusion in International Monetary Fund reserve currency basket

PUBLISHED : Monday, 07 December, 2015, 4:08pm
UPDATED : Monday, 07 December, 2015, 4:08pm

The yuan’s inclusion in the International Monetary Fund’s reserve currency basket is a major step forward for the currency, but there’s still a long way to go before it becomes a real international currency.

It was big news last week when the IMF decided to add the yuan into the Special Drawing Rights(SDR) basket from October next year, putting it alongside the US dollar, euro, yen and pound. Hong Kong’s stock market celebrated the news by rising two days in a row.

After the celebrations, however, we have to face the reality that the has a lot to do to catch up with other major currencies.

On the trade settlement side, the yuan is now the fourth-most-used currency, according to Swift, but the percentage is only 2.79 per cent. The top three comprise the US dollar, with 42 per cent, euro 30 per cent and pound 9 per cent.

The IMF set the yuan’s weighting in the SDR basket at 10.92 per cent, below market expectations of 14 per cent. That compares with the US dollar’s new weighting of 41.73 per cent, the euro’s 30.93 per cent, the yen’s 8.33 per cent and the pound’s 8.09 per cent.

SDR inclusion means IMF fund managers will have to rebalance their portfolio. But it should be noted that the total size of SDR basket stood at only US$280 billion. The rebalancing means IMF fund managers will only have to buy about US$30 billion worth of yuan, which is not much.

The other assumed benefit of SDR inclusion is that China will relax its capital controls and allow more cross-border trading, such as launching the stock connect between the Shenzhen and Hong Kong stock markets. However, there has been no confirmation on the timing of such a move.

And even if it does happen, we should not expect too much. The one-year old Shanghai-Hong Kong Stock Connect only had turnover equal to 5 per cent of the Shanghai stock market turnover at its peak, and has since fallen below 0.5 per cent.

The other cross-border fund flow scheme, the mutual recognition scheme to allow Hong Kong and mainland fund products to be sold in each other’s market, began on July 1. Five months on and not a single fund has been approved for cross-border selling under the scheme.

The mainland has definitely set out on the road to turning the yuan into a real international currency but there is still a long way to go.