REUTERS/Carlos Barria

Chinas Quest to
Global Currency Recognition
On Monday 30 November, 2015, the International Monetary Fund
(IMF), announced it will admit Chinas yuan into its Special Drawing
Rights (SDR) currency basket. Could this come at a time when
China needs it the most? Thomson Reuters experts explore the
reasons behind the IMFS decision, the global implications of the
inclusion and what the markets can expect from China in 2016.

RMB (renminbi) official

currency of the Peoples
Republic of China
Yuan a unit of the
renminbi currency
CNY onshore renminbi
CNH offshore renminbi

FEBRUARY 2016

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Back in November 2010, in its regular five-yearly review of the basket of currencies that make up its
SDR, the Executive Board of the IMF decided the Chinese currency wouldnt be joining the U.S. dollar,
euro, pound sterling or Japanese yen in its SDR after all. After much speculation, the timing wasnt right.
Five years later, this has changed.
Eric Burroughs, Editor & Managing Analyst of Reuters Buzz, said that with this move, the IMF has taken an important
step in terms of acknowledging Chinas financial openness to the world as well as its global economic importance.
While its a largely symbolic gesture at this point, it does have implications near term and definitely long term in terms
of China doing more to open its financial markets to the world, he said.
Ron Leven, Thomson Reuters Proposition Manager, FX Pre-Trade Strategist, explained the IMF uses two specific criteria
to judge whether a currency is eligible to be included in the SDR. The country needs to play a central role in the global
economy and they specifically measure that by the size of their trade over the five-year review period, he said, adding
clearly China meets that decisive factor for inclusion.
The other criterion is less set in stone. The IMF says the currency should be freely usable, but there is no exact
specification for what freely usable constitutes. The IMF has made it clear that being convertible is sufficient for it to be
usable but not necessary. What the IMF feels this means is to some degree arbitrary, explained Leven.

RISING EXPECTATIONS
No one can deny that Chinas internationalisation has
taken the world by storm. The level of growth the renminbi
(RMB) has experienced in the past years has astonished
even the more cynical minds. Yang Du, Thomson Reuters
Head of China Business Desk, stressed that right now
international recognition is critical for China. He explained
the IMF move resembles, in international awareness and
importance, Chinas successful bid to host the 2008
Summer Olympics Games.
The Peoples Bank of China (PBOC) sees the evolution to
internationalise the currency as a means to get wider
recognition, a forceful power for other countries to accept
the RMB in a larger scale, he said. Yet, the process is far
from challenge-free. There are still practical issues in the
market, especially from the policy perspective. China
needs to deliver. But we hope the decision the IMF has
made will encourage China to further liberalise its
financial policies and be able to further open up to the
world, explained Du.
The PBOC said the move, which was backed by other
countries including the United States, Britain and Japan,
shows the international community expects China to play
a bigger role in the world economy. A statement released
by the PBOC read: The inclusion of the RMB in the SDR
basket will increase the representativeness and
attractiveness of the SDR, and help improve the current
international monetary system, which will benefit both
China and the rest of the world. It also means that the
international community expects China to play a bigger
role in the international economic and financial system.
Going forward, China will continue to deepen and

accelerate economic reforms and financial opening,

and contribute to promoting world economic growth,
safeguarding financial stability and improving global
economic governance.
During the past months Beijing has pushed forward a flurry
of reforms, including better access for foreigners to Chinese
currency markets, more frequent debt issuance and
expanded yuan trading hours. But, more is expected from
China. IMFs Managing Director Christine Lagarde, who
earlier this year stated it was a question of when, not if,
Chinas yuan would meet the IMFs criteria to join the SDR.
Post inclusion made it clear she did not expect Beijing to
stop there. The renminbis inclusion in the SDR is a clear
indication of the reforms that have been implemented and
will continue to be implemented, she said.

ENSURING STABILITY
Divyang Shah, IFR Senior Strategist, explained that the
decision by the IMF recognises the progress that China
has made. It is also, when considering the long term
perspective, confirmation that China is and will be a
bigger player in the global field and financial architecture.
He said:

The IMF have a desire to see a

stable China, which continues to
reform itself, playing a positive role
in the global economy thats why
they have taken the decision now.

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The potential to enhance stability in the financial markets

should not be undervalued. Playing a positive role in the
economy is something that China has already done in the
past. Burroughs said: During the late 1990s there was a
lot of speculation around whether China would devalue its
currency. It didnt. In effect, during the height of the Asian
crisis, when many countries where devaluing their
currency, China decided to be a beacon of stability.
And Shah believes that stability and the role China
played prevented an already hefty crisis from escalating
even further. It once again took this role at the height of
the global financial crisis in 2008, placing a massive
stimulus and not playing games. China recognises the
need to play a positive role [in the global economy] and
that comes with adding to global stability rather than
playing around with their currency for short term gains,
he explained.
Ahead of the inclusion of the RMB into the SDR,
many claimed the move would be largely symbolic,
a legitimacy-builder to encourage even more usage of
the Chinese currency. Shah believes it also showcases
the recognition that the world has changed. In the
past, developed countries were dominant. Now we are
transitioning towards China and the emerging markets.
There is now recognition that 50% of the global economy
is related to growth and what happens in China, says
Shah. He explains that this is a positive development
as without the inclusion of China, the IMF would be
less relevant.

THE ROAD AHEAD

The Chinese economy is slowing down. The week of
10 August 2015 saw how Chinas central bank made a
decision to reform the yuan <CNY=PBOC> after recent
poor economic data. In July 2015 exports fell by 8.3%,
far lower than expected, and the producer price index was
down 5.4% from a year earlier.
The central bank changed the way it calculates the
currencys daily midpoint against the dollar basing the
CNYs midpoint on market makers quotes and the
previous days closing price. The move is a sign that the
countrys leaders are increasingly concerned about the
economy as the CNY climbed in tandem with the USD.

evolving global economic environment, the Chinese

currency is likely to be significantly more volatile in 2016
than it has traded in the past. The economy is slowing
down and the central bank is trying to provide stimulus.
By most measures, the currency is significantly
overvalued, he said, adding that it seems like that
despite the constructive nature of the SDR inclusion,
the Chinese currency will be more volatile and prone to
weakness in 2016.
And Shah believes the depreciation was an attempt to
show that, even though still controlled, the currency can
move both ways, showcasing its flexibility, one of the
criteria to be included in the SDR. There is some
suggestion that including the currency in the SDR could
help provide inflows and act as a buffer to the outflows
China is experiencing right now. But, I dont see that as
being that important, I think the longer term perspective
is quite key, he explains.

TRANSPARENCY CONCERNS
The need for greater transparency without a doubt
remains in the back of many an international investors
mind. As Chinas role in the global economy advances and
develops, the need for transparency is bound to result in
greater scrutiny.
But, change is already happening. When the mini
devaluation took place in August, explains Burroughs, the
PBOC were surprised by the global reaction, subsequently
holding two news conferences that week as well as
releasing statements in English. This is fairly unique;
these things take time but there is a need to be more
transparent, Burroughs said. He added: there is already
an effort underway to achieve this goal.
Du explained that liquidity, accessibility, transparency and
connectivity all are essential for investors to participate.
The market itself is not meant to be led by policy, said
Du. More will have to be done to give private investors
greater confidence. Shah said: Without confidence
private investors will not jump in at the opportunity of a
new currency. It will not happen quickly, but rather will be
a long process; it will require confidence and transparency
in government policy before private investors will make a
major investment commitment to the RMB.

But, a slightly weaker currency may not be bad news after

all. China can make a good casea weaker RMB fits
better with the fundamental picture we see in the world
right now, said Burroughs. Leven explains that given the

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THE RESERVE CURRENCY PATH

Is the inclusion in the SDR a step forward for the RMB
becoming a reserve currency or even replacing the dollar
in this role? 20 years ago the reserve currency debate
revolved around whether the Japanese yen could be a
potential candidate to rival the dollar as a reserve currency.
Then, it was the euro and now the RMB. But this would be
highly unlikely right now. China would need to overcome
existing trade and investment challenges to make this a
viable option. To become a reserve currency, explains
Shah, the currency needs to be a unit in trade and
settlement, a store of value, a proven investment vehicle,
adding that this is what makes the US dollar stand out.

Domestic Chinese investors do have the demand to

further diversify their investments and the same with
some for the Chinese institutions, said Du, stating that
without free access of onshore offshore capital markets,
the RMB cant really be perceived as an ideal investment
currency for international investors.

FUTURE OF THE SDR

The US dollar still offers, despite well documented

challenges, the highest level of liquidity for investors, and
that liquidity helps it maintain its role as the main reserve
currency, adding that the debate around whether a new
challenger may replace it will always exist.

The importance of the IMFs inclusion of the Chinese

currency should not be understated. Leven explains that
the markets will have to wait many years until another
currency is added into the IMFs SDR. The four currencies
have been in place for decades. I think one thing to keep
in mind is the addition of a currency is not something that
happens with frequency. No other economies are looking
to become big enough to meet the criteria necessary, he
said highlighting that India and Brazil could be potential
future candidates.

But that need not be Chinas current concern. Du explains

that the Chinese government is facing high pressure for
its outbound flow of capital and high volatility. The spread
between the CNH and CNY is something Chinese
authorities are sensitive about.

The IMF doesnt change the financial architecture

frequently and Shah agrees that probably we will have to
wait a few decades before these changes happen again.
Despite challenges ahead, the inclusion of the Chinese
currency into the SDR is a big milestone for the RMB.

Bringing together one currency the RMB is Chinas top

priority, as well as further opening of the capital accounts.
More is yet to come. Last October, the Securities and
Futures Commissions executive director for investment
products stated the first batch of mutual recognition
funds as part of an agreement between China and Hong
Kong are expected to be announced by the end of 2015.
The aim is to enable global asset managers to secure a
bigger slice of money available for investment in China
and vice versa.

If you would like to contact the Thomson Reuters experts

showcased in this report, please email:
marketimpactgroup@thomsonreuters.com

SPECIAL DRAWING RIGHT (SDR)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries official
reserves. Its value is currently based on a basket of four major currencies, and the basket will be expanded to
include the Chinese Renminbi (RMB) as the fifth currency, effective October 1, 2016. SDRs can be exchanged for
freely usable currencies. As of November 30, 2015, 204.1 billion SDRs had been created and allocated to members
(equivalent to about $285 billion).
Source: IMF

The weight of the RMB in the SDR basket is 10.92%, whereas the weights of the U.S. dollar, the euro, the Japanese
yen and the British pound are 41.73%, 30.93%, 8.33% and 8.09% respectively.

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China Insight at your Fingertips

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2015 Thomson Reuters. S028238 12/15.

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FX BUZZ, the foreign exchange intraday market intelligence and commentary service, exclusive on Eikon,
brought users the latest insights on the IMF decision as the events unraveled.
BUZZ-China shifts to broader CNY NEER FX management
14-Dec-2015 08:31:21 AM
China formalised on Friday what had already become apparent since the
Aug mini-devaluation: a shift in focusing on CNYs broad trade-weighted
value than focusing just on the USD/CNY cross. CFETS, the main FX/
interbank market organizer, published a new index referencing 13
currencies and weights based on trade importance that put more
emphasis on USD, HKD and EUR relative to the BIS TWI weights (Full
Story). As we have noted, the PBOCs big shift has been to de-link CNY
from USD strength rather than pursue aggressive depreciation (Full
Story). Anyone tracking the CNY NEER since the Aug move would have
seen that was clearly the case: the NEER had hit a record high just before
the mild resetting of the PBOC fix in Aug and has mostly moved sideways
since then. USD/CNY is bound to strengthen more as US policy diverges
from China and Beijing lets the market play a bigger role, but it wont mean sharp RMB depreciation. Instead China is getting more
flexibility on FX and monetary policy (Full Story). Chart: http://link.reuters.com/qyk45w

BUZZ-CNY drop more USD de-linking than deprecation

09-Dec-2015 09:04:21 AM
The slight but consistent nudge higher in USD/CNY fixes has sparked
speculation that Beijing is prepared to allow a sharper CNY depreciation
near-term. That seems unlikely. What is notable is that the PBOC fixes
have actually been below model forecasts, thus the PBOC is playing
along with what it should allow directionally but trying to limit the drop.
At the same time, the successful SDR review seems to have prompted
the PBOC to step back and let the FX rate become more market-driven
just before and now after the review. Less intervention has been notable.
Thus the market is likely to play a greater role going forward in allowing a
gentle USD/CNY and thus USD/CNH rise within the 2% trading band.
Importantly, since the day before the mini-deval on Aug 11, CNY is down
1.3% on a NEER basis while USD is up 1.7%. This is more about de-linking
from USD strength than outright CNY depreciation. Chart: http://link.reuters.com/qyk45w

BUZZ-RMB & SDR: a long march towards reserve currency

30-NOV-2015
The IMFs inclusion of Chinas RMB in the SDR basket is a
milestone if a largely symbolic one acknowledging the countrys
global economic clout. Near-term implications are limited
implementation waits until Oct 2016, SDRs are merely
accounting units and there is nothing compulsory for IMF
members on adding RMB to reserves and the bigger picture
importance is that of Chinas financial opening up. Still, reserve
currencies are unique beasts: only the USD and EUR can claim
that title these days, while other currencies such as GBP (4.7% of
global allocated reserves), JPY (3.8%) let alone AUD & CAD are
relatively minor asset allocation/reserve diversification plays.
Deep, liquid markets are needed so that FX reserves can be relied
on in an instant: look at how Chinas capital outflows and reserve
drop have barely made a ripple on global markets. The policy transparency and market openness needed to be a true reserve
currency remains a long way off for Beijing.

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Biographies & Photos

Eric Burroughs, Editor & Managing Analyst of Reuters BUZZ, the intraday
market intelligence and commentary service. Eric has covered markets and
economics around the world for 15 years with Reuters, including stints in New
York, Tokyo and Hong Kong, where he previously served as Asia Financial
Markets Editor.

Yang Du, Head of China Business Desk. After 7 years in the Thomson Reuters
Fixed Income division Yang recently spearheaded the Thomson Reuters China
Desk. The dedicated China Desk supports Chinese customers in Europe and
North America aiming to expand globally. He is recognized by key players in
the industry as a thought leader and expert on RMB internationalisation,
regulation, the Chinese capital market and is a frequent author and public
speaker.

Ron Leven, Proposition Manager, FX Pre-Trade Strategist. Ron manages FX

pre-trade content development for Eikon following a long career as a Senior
Currency and Fixed Income Strategist at several major banks, including JP
Morgan, Lehman Brothers and Morgan Stanley. Ron began his career as an
Economist at the Federal Reserve Bank of New York. He has a PhD in
Economics from Rice University and is an active Adjunct Professor at
Columbia University.

Divyang Shah, IFR Senior Strategist. Divyang follows broad macro trends
globally with a view to building an analytical framework. Before joining IFR,
Divyang was editor of the flagship products at IDEAglobal as well as head of
FX research, and then moved to Chief Strategist at Commonwealth Bank of
Australia. He was named Reuters Commentator of the Year in 2012.

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