SDR inclusion far from enough to increase yuan’s allure to investors
Slowing economic growth, capital exodus concerns and underdeveloped financial markets are challenges that IMF’s official stamp cannot overwrite
The yuan is facing a long march towards reserve currency status , a process that won’t be dramatically accelerated by its potential inclusion in an elite, yet symbolic , currency basket, experts say.
Beijing is keenly anticipating an International Monetary Fund announcement this month on whether the yuan will be incorporates into its Special Drawing Rights basket, a quasi-currency rarely used in financial transactions.
Kevin Lai, chief Asia-ex Japan economist at Daiwa Capital Markets, said the debate over SDR inclusion was “almost irrelevant” to the yuan’s value going forward and to how China could avoid a hard landing of its debt-ridden economy. The debt-to-GDP ratio of the world’s second-largest economy now stands at around 300 per cent.
“The house is on fire and the SDR inclusion is a small bucket of water 10 miles away,” said Lai, whose constant downbeat views on the yuan and the mainland Chinese economy have earned him the nickname “yuan bear”.
“An inclusion is neither adequate nor necessary for China to get the reserve currency status,” he said on Wednesday. “China will have to do a lot more before the world wants to own more renminbi-denominated assets.”
Michael Every, Asia-Pacific head of financial markets at Rabobank, sees the USD/CNY exchange rate slipping to around 7.75 by the end of next year, similar to the Hong Kong dollar’s value against the greenback.
“While SDR entry would be psychologically and politically significant, it would merely be the first step in a much longer journey: indeed, it may even herald a significant weakening of CNY,” Every said in a report on Wednesday.
“It could be that China will step back from propping up the currency as soon as the SDR decision has been made, or perhaps shortly afterwards if or when the US raises interest rates for the first time in nearly a decade.”
Beijing has made an all-out effort to impress the IMF, which is engaged in a five-yearly review of the composition of the SDR basket, now consisting the US dollar, euro, pound and yen.
But investors in the private sector were unlikely to be taking guidance from the IMF’s SDR portfolio, and the mainland currency’s inclusion would do little to prod them into holding more yuan-denominated assets, Every said.
“In short, China is a massive economy but does not yet have the deep, liquid, trusted financial markets that the US, Europe, the UK, and Japan offer,” he said. “Major financial and supply-side reforms are required to provide a steady of flow of such assets in the future.”
Joining the cautious camp, Kevin Gardiner, global investment strategist at Rothschild Wealth Management, which oversees €12.6 billion (HK$104.8 billion), said on Wednesday inclusion would be of little practical importance for investors.
“Will an inclusion galvanise international investors’ appetite towards investing in China? Only very slowly,” he said.