The rapidly-rising renminbi has come of age with the news that it is to be included in the International Monetary Fund’s basket of currencies with Special Drawing Rights (SDR). Its inclusion may sound like a dry technical measure, but it is anything but, and it is changing the landscape of global commerce fundamentally.
The renminbi’s journey to becoming a globally-recognised hard currency starts now
First, it means the renminbi is now being accepted as one of the world’s reserve currencies, bringing liquidity to global trade alongside the U.S. dollar, the British pound, the euro and the Japanese yen. The renminbi’s journey to becoming a globally-recognised hard currency starts now.
Second, it represents a significant vote of confidence by IMF economists for China and its path to economic reform. Clearly the IMF accepts the liberalisation of the Chinese economy – as set out in our recent white paper – is irrevocable, and is a process that will continue.
So what will the inclusion of RMB actually mean for global markets?
For one thing, global reserve managers will have a new currency to value central banks’ assets, alongside gold and the other SDR currencies.
Other international and pan-regional monetary organisations use the SDR currencies as a unit of account, to help them deal with exchange rate volatility, so the impact may also show wherever the SDR currencies are mentioned in international treaties.
And of course the IMF and its member countries will adjust their SDR currency holdings, meaning they will need to import renminbi to match the allocated weightings (US dollar 41.73 percent; euro 30.93 percent; renminbi 10.92 percent; pounds sterling 11.3 percent; and Japanese yen 9.4 percent.
The IMF’s decision certainly comes at a pivotal moment for China, as the country is experiencing a significant slowdown in growth for the first time since its economic reforms. In 2016 Thomson Reuters FX analysts predict that growth will hit around six percent, while the RMB may depreciate further.
Most significantly, perhaps, the renminbi’s formal recognition as a global reserve currency provides companies with ever greater confidence to use the renminbi as a stable and reliable transaction currency.
The renminbi’s rise to become a global currency has in part been a reaction by the Chinese authorities to the needs of the country – a recognition that in order to maintain a country of 1.5 billion people it must participate in global trade. It remains a controlled economy, but with a gradually liberalizing currency.
The pace of this interconnectivity will only accelerate
I have seen evidence of the gradual opening of China’s economy myself. On a recent trip to Shanghai I was struck by the number of companies talking about interconnectivity. They are clear about the opportunities before them, and the advantages of linking to the global financial system.
From a country growing as a manufacturing powerhouse, it is now developing into one which turns increasingly to external markets. The shift from investment led to consumption led, from heavy manufacturing led to higher value adding and services led, and from state directed to more entrepreneurial businesses, are significant shifts for any country, let alone a country of the size and scale of China.
Between now and October 2016, when the RMB formally joins the IMF’s basket of currencies, the pace of this interconnectivity will only accelerate.
For Thomson Reuters, it is a significant step on the journey we started four years ago on the infrastructure requirements for the world’s new renminbi trading hubs. We started in London, and are now working in centres around the world, such as Toronto and Singapore.
We are now on the countdown to October 2016, and the next step in the ascent of the renminbi.