The ren­minbi de­serves SDR recog­ni­tion

China Daily (Canada) - - FRONT PAGE -

Given that China is now the world’s largest ex­porter and sec­ond-largest econ­omy, it is a mat­ter of when, not if, the ren­minbi will be in­cluded in the In­ter­na­tion­alMone­tary Fund’s spe­cial draw­ing rights (SDR) cur­rency bas­ket along­side the dol­lar, euro, pound and yen. And the IMF’s five-yearly SDR re­viewlater this year will be a good time to do so.

The ren­minbi’s in­clu­sion would ce­ment its ris­ing re­serve cur­rency sta­tus, re­as­sure the many in­vestors and com­pa­nies around the world al­ready ac­tively us­ing it and ac­cel­er­ate in­vest­ment in the cur­rency.

To qual­ify, the ren­minbi needs to be “freely us­able”, though not nec­es­sar­ily “fully con­vert­ible”. The yen be­came fully con­vert­ible only in 1980— two years af­ter the IMF de­ter­mined it to be freely us­able. Sim­i­larly, the ren­minbi could be given SDR sta­tus now, while China con­tin­ues to open up its econ­omy.

The ren­minbi is the world’s fifth most-used pay­ment cur­rency, ac­cord­ing to So­ci­ety forWorld­wide In­ter­bank Fi­nan­cial Telecom­mu­ni­ca­tion (SWIFT), and 27 per­cent of China’s to­tal goods trade is now set­tled in ren­minbi. Fu­elled by strong pol­icy back­ing from Bei­jing, the in­ter­na­tion­al­iza­tion of the ren­minbi is like a roar­ing train with­out a re­verse gear.

On­shore, the Shang­hai Free Trade Zone spear­heads pi­lot tests for China’s cap­i­tal ac­count lib­er­al­iza­tion, in­clud­ing the “two-way ren­minbi sweep­ing” pro­gram which ef­fec­tively al­lows free move­ment of cor­po­rate funds in and out of China.

Off­shore, ren­minbi cen­ters led byHong Kong, Sin­ga­pore and Lon­don are now pro­vid­ing a wide range of ren­minbi hedg­ing and in­vest­ment prod­ucts, plus ac­cess to raise cap­i­tal in the “dim sum” bond mar­ket, now worth a stag­ger­ing 750 bil­lion ren­minbi ($91.78 bil­lion).

For­eign in­vestors are en­joy­ing in­creas­ing ac­cess to China’s stock and bond mar­kets, and the ren­minbi for­eign ex­change mar­ket has be­come con­sid­er­ably deeper and more liq­uid.

More than 60 cen­tral banks glob­ally have in­vested in ren­minbi as­sets, with es­ti­mated hold­ings of more than $100 bil­lion. So even be­fore gain­ing SDR sta­tus, the ren­minbi is a rec­og­nized cur­rency in the eyes of many cen­tral banks. And ac­cord­ing to the Peo­ple’s Bank of China, the ren­minbi now ranks sev­enth in re­serve hold­ings glob­ally.

All this sug­gests the ren­minbi broadly meets the tech­ni­cal re­quire­ments based on the cur­rent “freely us­able” SDR cri­te­rion as well as the po­ten­tial newre­serve as­set cri­te­rion.

It should also count in the ren­minbi’s fa­vor that China is be­gin­ning to ex­ert its geopo­lit­i­cal in­flu­ence on the global stage, start­ing with its lead­ing role in es­tab­lish­ing the Asian In­fra­struc­ture In­vest­ment Bank, which will pro­vide fi­nance to in­fra­struc­ture projects in Asia, while giv­ing a greater voice to emerg­ing mar­kets col­lec­tively. Does that mean China can­not do more? Of course,

not. For one, China still im­poses for­eign ex­change con­trols on per­sonal cap­i­tal trans­ac­tions. And for­eign in­vestors still don’t have suf­fi­cient ac­cess to Chi­nese cap­i­tal mar­kets.

But it would be a mis­take to doubt Bei­jing’s po­lit­i­cal will to de­liver greater con­vert­ibil­ity. PBoC Gover­nor Zhou Xiaochuan has vowed to launch a se­ries of re­forms in 2015, in­clud­ing pilots to al­low in­di­vid­u­als to in­vest di­rectly over­seas— start­ing with the im­pend­ing launch of the Qual­i­fied Do­mes­tic In­di­vid­ual In­vestor (QDII) scheme. The Shang­hai-Hong Kong Stock Con­nect pro­gram is also set for ex­pan­sion, while a sim­i­lar ar­range­ment link­ing up Shen­zhen and­Hong Kong is ex­pected to take off later this year. Just re­cently, the mu­tual recog­ni­tion of funds be­tween the Chi­nese main­land and­Hong Kong has been an­nounced, al­low­ing el­i­gi­ble funds to be dis­trib­uted on ei­ther side of the bor­der.

Striv­ing for man­aged con­vert­ibil­ity will af­ford China more con­trol over its eco­nomic trans­for­ma­tion and the as­so­ci­ated risk. And a steady, man­aged emer­gence into the global econ­omy is good not only for China but also— given the coun­try’s sheer size and global in­flu­ence— for the rest of the world.

The role of the IMF is not just to foster cur­rency and mon­e­tary de­vel­op­ment, but also to se­cure fi­nan­cial sta­bil­ity and pro­mote sus­tain­able eco­nomic growth. Right now, the IMF is in­stru­men­tal to China’s fur­ther open­ing— a po­ten­tial cat­a­lyst for its fu­ture lib­er­al­iza­tion and next phase of eco­nomic and fi­nan­cial de­vel­op­ment. The au­thor is Stan­dard Char­tered chief ex­ec­u­tive of­fi­cer for Greater China.


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