Global market participants are increasingly looking to monitor Renminbi (RMB) movements, hedge RMB exchange rate risk when managing RMB investment portfolios and to monetise views on the RMB exchange rate.
To serve such needs, a transparent and tradable RMB index and exchange rate tools based on it are desirable.
The increasing internationalisation of the RMB
The People’s Bank of China’s (POBC) RMB Currency policy indices, launched on 11 Dec 2015, address the importance of shifting global emphasis of the RMB exchange rate against the USD towards multiple currencies.
Such a move aims to decrease the perceived volatility of RMB on the dual exchange rate screen, where large swings in the currency rate sometimes are caused merely by economic events in the USA, and may have little relationship with the international value of the RMB.
A bilateral exchange rate of USD to onshore RMB (USD/CNY) does not reflect the trade and financial relationships of China with multiple countries across the globe.
The range and diversity of China’s trading partners boosts demand for the RMB and highlights the limitations of using a bilateral exchange rate for measuring the currency.
Liberalisation of the RMB market
Over the last two decades, China has demonstrated tremendous economic growth, supported by the development of its exchange rate infrastructure.
The steps taken by the Chinese government towards RMB internationalisation were applauded by the International Monetary Fund (IMF), which announced in November 2015 the inclusion of the RMB in SDR, to be effective in October 2016.
One of the most successful currency benchmarks is the USD Index (USDX) created by the Intercontinental Exchange (ICE) Futures U.S., which includes only six currencies (CAD, CHF, EUR, GBP, JPY, SEK).
Despite the fact that the current basket of the USDX does not entirely reflect the latest US economic relationships due to the shift in the economic landscape towards China over the last decade, the USDX futures have become the world’s most widely-recognised traded currency index futures.
There are rarely indices developed on currencies of developing countries.
The RXY Index series is the latest example of tradable currency indices, for the first time on RMB, in the course of the currency’s internationalisation process.
The Thomson Reuters/HKEX RMB Currency Indices (RXY) provide an independent, transparent and unbiased valuation of the RMB against the currencies of China’s most important trading partners.