Inclusion of the renminbi may spur wider use of IMF currency unit
David Marsh says Beijing is likely to set up an SDR borrowing platform as early as this summer, in advance of the renminbi’s formal entry into the IMF’s composite currency
China appears likely to speed up promotion of the International Monetary Fund’s special drawing right under a plan to establish a platform this summer for SDR borrowing by Chinese and foreign entities on its onshore capital market.
The initiative will help fulfil several strategic Beijing monetary and economic objectives. These include boosting international acceptance of the renminbi, which enters the IMF’s composite currency unit in October with a weighting of around 10.9 per cent, joining the dollar (41.7 per cent), euro (30.9 per cent), yen (8.3 per cent) and sterling (8.1 per cent) as officially recognised reserve currencies.
Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, helping dampen capital outflows that have gained prominence in the last 18 months as a result of progressive liberalisation of capital controls.
The SDR borrowing platform seems likely to be set up as early as July, earlier than expected, and in advance of the currency’s formal SDR adherence. This will necessitate creating a synthetic SDR that can be related, through forward pricing, to the “new” SDR being created in October. This step will place pressure on the IMF to update its procedures for fixing the SDR, which at present is set daily, but in future may need to be established on a 24 hours a day basis.
China is open to extending further the number of currencies in the SDR basket. It would favour, for example, the rupee joining in coming years in line with India’s decision to internationalise its currency – but only if driven by capital market requirements.
The Chinese initiative, depending on the market response, could eventually allow the SDR to become a currency in its own right, rather than an artificial, narrowly used aggregation of leading currencies. But this is a long journey that faces many hurdles and may never be completed. Foreign sovereign issuance of renminbi bonds is at a very preliminary stage. The UK government raised 3 billion yuan (HK$3.58 billion) in an offshore bond in October 2014. South Korea issued a 3 billion yuan domestic Chinese “panda” bond in December 2015, a pioneering action that could pave the way for further such transactions.
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If Chinese resident investors become keen purchasers of SDR-denominated bonds, as well as domestic renminbi bonds by foreign borrowers, this will contribute to improving the health of China’s international balance sheet. Mainland officials have long backed shifting China’s net foreign assets decisively towards foreign holdings by non-public-sector investors. Furthermore, officials would welcome denominating some of these claims in renminbi rather than foreign currencies led by the US dollar.
Bringing the Chinese currency into the SDR, in a long-term move trailed by Chinese officials to produce a new “super-sovereign reserve currency”, was accomplished last November after a short, decisive Beijing campaign to win acceptance.
The decision marks the latest stage in a long Chinese effort to reduce the US dollar’s dominance. Yet the US Treasury joined the other international representatives on the IMF executive board in unanimously approving the renminbi’s inclusion. The US believes that, by obliging Beijing to open up its capital markets and other parts of the economy as a quid pro quo for the renminbi upgrading, the West has won a worthwhile prize in accelerating China’s international economic integration.
Zhou Xiaochuan (周小川), governor of the People’s Bank of China, has been the public face of Beijing’s SDR campaign. He said in March that China intended to issue domestically orientated SDR-denominated bonds to promote the composite currency’s use. Up to now, however, the start date has been uncertain.
A nascent market in SDR bonds started in the early 1980s, but never took off, because of the wide gulf between the official use of the SDR as a reserve currency unit for central banks and the virtually non-existent private market for the SDR. As a result of the latest Chinese action, this gap could narrow.
David Marsh is OMFIF managing director, in London. This was originally published as part of OMFIF Commentary. See www.omfif.org