Renminbi : The World’s Next Reserve Currency?

Chinese equities have rallied over 110% in the past year, driven by a combination of policy easing and financial market liberalisation

Chinese equities have rallied over 110% in the past year, driven by a combination of policy easing and financial market liberalisation. We believe the latter will be enduring and continue to drive the equity market higher over the coming decade. Meanwhile policy easing will continue to provide a tailwind in the short-term, but with the government no longer targeting double-digit growth, we do not expect indefinite easing.

The International Monetary Fund will probably make the biggest change to its global reserve asset, the Special Drawing Rights (SDR) since its creation in 1969, by including the Chinese Renminbi. It is due to make its 5-yearly assessment this October/November. Inclusion will be a symbolic milestone for China’s emergence as a key player in the global financial system.

There are two main tests for inclusion. Firstly the currency needs to be important for global trade. The Renminbi will pass that test with flying colours. The second is that the currency has to be “freely usable”. The Renminbi will struggle with this test, but that struggle will be the catalyst for further financial market reform this year and will clearly benefit equity market investors.

The PBoC Governor recently announced that China will achieve full capital market convertibility this year to help secure the RMB’s inclusion in the SDR basket. The opening of the Shenzhen-Hong Kong Stock link later this year and easing controls on cross-border portfolio investment by individuals clearly are motivated by the this goal. The herculean efforts to clean up local government debts and introduce more financial market transparency are demonstrate the sheer will of the Chinese authorities to achieve a position on the podium of the SDR, currently reserved for the US Dollar, Euro, Yen and Sterling.

ETF Securities (UK)