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Reserve managers see potential in renminbi, expect International Monetary Fund to increase weighting in next Special Drawing Rights reassessment

Special drawing rights (DTS) are additional foreign exchange reserves created, defined and maintained by the International Monetary Fund (IMF) since 1969, and their value initially expressed in gold. After the end of the Bretton Woods system in 1971, the DTSThe composition of has changed to include the currencies of countries with the largest shares of exports of goods and services.

On October 1, 2016, the IMF‘s DTS was expanded to include the renminbi (RMB) as the fifth currency, its inclusion signaled that China had entered the global economic stage. Five years after its inclusion, a RMB continued to gain ground in international markets?

Beginning of July, central bank spoke with five decision-makers: Zafar Parker at the South African Reserve Bank (Sarb), Kimty Kormoly at the National Bank of Cambodia, Robert Rekasi at the Central Bank of Hungary, Diego Gianelli at the Central Bank of Chile and Mohamed Araar at the Central Bank of Tunisia, on the importance of RMB in the reserves of the central bank following its inclusion in the DTS.

A rise in power

RMB has seen an increase in its international monetary functions by becoming a route for greater diversification of reserve currencies. RMBAs a result, the market share of as an international reserve currency has reached an all-time high.

According to IMF‘s Monetary composition of the civil servant FX reservations survey, in the first quarter of 2021, RMB employee’s share of assets FX central bank reserves reached 2.45% ($ 287.48 billion). At the end of 2016, when the IMF started reporting RMB reserve assets, currency accounted for only 1.07% of total reserves. The growing share of RMB the allocation of central banks’ foreign exchange reserves shows that RMB is now more widely accepted, and the interests RMB assets continue to increase.

The five decision-makers agreed that the IMF had made the right decision to include RMB in the DTS basket five years ago. Parker and Rekasi shared the view that the inclusion of a currency from rapidly growing emerging market economies provided a better representation of the global macroeconomic and financial system. At the same time, the inclusion of RMB helped to further open up Chinese capital markets.

RMBinclusion in the DTS emphasized its importance for the development of the global financial system over the years. The use of RMB cross-border payments has grown rapidly. According to a Swift report from May 2021, RMB was the fifth most active currency for domestic and international payments by value, with a share of 1.9%. However, given the very large volume of trade and investment between China and other countries during the same and previous periods, the global payments market share in RMB was disproportionately low. In addition, RMB FX transaction volumes have increased dramatically. According to the Bank for International Settlements, in April 2019, RMB average daily transaction volumes were $ 284 billion, up 41% from April 2016. RMB FX exchanges were mainly carried out in Hong Kong, London and Singapore, contributing almost 60% RMB FX transaction volumes.

Stimulate development

RMBinclusion in the DTS was also important for the development of the global financial system and led to a more stable financial market, said Kormoly and Araar. “RMB has shown its importance in both trade and investment activities, ”Gianelli added.

RMB will soon undergo its first reassessment since joining the DTS basket. The majority opinion tended to agree on an increase in RMBin the next reassessment, scheduled for mid-2022. Gianelli said that China’s participation in the global trade market is about 15%, the participation of RMB in global fixed income markets around 20%, but the RMBthe weight was only 11%. As a result, he expects RMB would increase, or at least maintain, his current weight.

Parker and Kormoly are waiting RMBs weight will gradually increase over time, given RMB has made progress in terms of internationalization. It has also had a positive influence on the global economy, with the increased use of RMB in cross-border payments, settlements, trade finance, bond issuance and trading. Araar believes that the continued inclusion of RMB within the DTS reinforces that the currency is stable in value. However, Rekasi took a more conservative view: “Assessing trends in global trade, which could be a weight-shifting factor, during economic stress from Covid, can be a challenge. ”

Increased interest

Since Chinese bonds have been included in the FTSE World Government Bond Index in March 2021, they were included in three other major international bond indices. The cumulative net increase in foreign establishments RMB bond holdings in the first half of 2021 reached CNY4620.8 billion. In June 2021, foreign holdings of Chinese bonds reached CNY3.72 trillion in total, an increase of 48.3% compared to June 2020. However, Chinese bonds still only represent 3.5% of total bond holdings.

The participation of international investors in the Chinese bond market has steadily increased and foreign investors continue to increase their RMB bond holdings. Although China-we The interest rate differential has narrowed slightly since the end of 2020, Chinese bonds remain relatively stable compared to the assets of other countries. Factors such as increasing the attractiveness of RMB assets and relatively high yields further boosted international investor confidence in Chinese bonds. It is expected that there is still enormous potential for a substantial increase in the proportion of foreign capital in Chinese bond holdings.

In recent years, the People’s Bank of China and several Chinese government ministries have issued a number of policies on RMB use and investment of onshore financial markets, highlighting the importance and support of the Chinese government for the continued internationalization of RMB. This support has made it possible to broaden the scale and depth of offshore activities RMB markets.

Opening up the Chinese financial sector is also an essential element of RMB internationalization, but to what extent the opening of the Chinese bond market has RMB internationalization depends on several factors. Sarb has noticed a growing appetite from emerging market central banks considering investing in China’s onshore bond market. It was the result of a streamlined investment process, improved regulatory transparency and increased operational support, Parker said. As a result, he believes the opening of the Chinese bond market will lead to a rise RMB allowances worldwide.

Rekasi and Gianelli consider that increasing the participation of foreign investors in the Chinese bond market will increase support for RMB exchange rate and improve operations of China’s onshore bond market. Kormoly and Araar believe the opening will facilitate a RMB exchange rate and will further strengthen internationalization.

Growing pains

RMBAccording to policymakers, China’s biggest growth challenges are infrastructure and procedures, which have been identified as some of the main issues investors face when investing in China’s onshore market. Parker said the biggest challenge towards RMBThe growth of is linked to the uniqueness of the country’s bond market structure, in particular the trading procedures and the wide bid / offer bond spreads.

Gianelli said there are some infrastructure issues that need to be addressed. He noted the we dollar was still very “predominant” in the world and, for this reason, a paradigm shift would likely take time. Araar said that the leadership of FX reserves has been the biggest challenge China has faced given the large proportion of we dollar holdings against RMB. He suggested that China might need to introduce policies to encourage other rulers to include RMB in their reserves.

RMB internationalization has entered a new period of opportunity. Offshore markets are more willing to accept and use RMB, while central banks and foreign institutional investors continue to increase their RMB asset holdings. China has actively positioned itself for continued internationalization with the People’s Bank of China and other government authorities, jointly introducing new policies and measures to promote cross-border trade RMB businesses and capital market investments. This has helped accelerate the opening of the onshore bond market and further integrate Chinese markets into the global financial system.

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