Will The RMB Depreciate After China's Accession To The SDR?

In October 1st, the renminbi officially became the fifth currency to join the IMF SDR currency basket. It became another international reserve currency after the dollar, euro, yen and pound sterling.

Since the new basket came into effect, it will allow the yuan to depreciate? Since the IMF ratified RMB basket in December 1st last year, the RMB has depreciated 4.38% against the central parity of the US dollar, and the RMB has also depreciated to a basket of currencies.

Faced with concerns, the regulatory authorities launched confidence in the RMB exchange rate on the eve of the basket.

Yi Gang, vice president of the central bank, said that there would be no need to worry about the depreciation of RMB when it joined the SDR. IMF's assessment of RMB's inclusion in SDR did not involve RMB valuation.

How does the RMB exchange rate go after the formal basket? There are different voices in the market now.

CICC expects that by 2020, the share of RMB reserves is expected to reach 7.8%, corresponding to about 5 trillion and 700 billion yuan in demand for RMB security assets.

In order to increase the attractiveness of RMB and become an international financial paction currency, the market generally expects that China's capital account liberalization and domestic financial reform will not stagnate with the RMB's formal accession to the SDR, but may continue to accelerate.

Lu Yuan commissar, chief economist at Xingye Bank, said in an interview with surging news: "after the RMB has joined the SDR, it has a responsibility that the exchange rate can not be fixed. This means that the RMB can not go with the US dollar. Taking into account the share of the US dollar in the SDR, other currencies need to play the role of the opposite of the US dollar. Therefore, from this logic, the RMB exchange rate needs to depreciate."

After RMB basket, the weight of RMB in SDR basket is 10.92%, and the weight of US dollar, euro, Japanese yen and pound sterling is 41.73%, 30.93%, 8.33% and 8.09% respectively.

Ping An Securities believes that the RMB exchange rate is still overvalued and needs further release of the devaluation pressure, coupled with the dislocation of the Sino US monetary policy cycle. The RMB exchange rate against the US dollar will continue to depreciate slowly, and it is likely to continue to achieve a depreciation of around 10% in the next one or two years.

However, the regulators launched confidence in the stability of the RMB exchange rate on the eve of the basket.

In September 29th, the official website of the central bank forwarded the article entitled "China's official accession to the SDR basket of currencies to help stabilize the RMB exchange rate", a special commentator of China's currency network. It also said that when the yuan was about to formally join the basket of SDR currencies, the demand for international investors to allocate Renminbi bonds increased further, which corresponded to capital inflow and would help stabilize the RMB exchange rate.

After the RMB has officially joined the SDR basket of currencies, we should continue to implement a regulated and managed floating exchange rate system based on market supply and demand and reference to a basket of currencies.

The RMB will continue to maintain a basic stability of a basket of currencies in the context of sustained economic growth, high speed and steady growth, favorable balance of trade in goods, continued growth of foreign direct investment, ample foreign exchange reserves, and a balanced capital flow.

The article says.

Yi Gang, vice president of the central bank, has also taken a reassurance for those worried about the depreciation of the renminbi.

During the G20 summit, he said that there would be no need to worry about the depreciation of RMB when joining the SDR. IMF's assessment of RMB's inclusion in SDR did not involve RMB valuation.

One day before the official basket of RMB, Pan Gongsheng, director of the State Administration of foreign exchange, said in the course of foreign exchange management research that China's economy still maintained favorable factors such as high speed growth, ample foreign exchange reserves, the upcoming RMB's entry into the SDR and the deleveraging process of foreign currency debt, which will support the stability of the RMB exchange rate at a reasonable and balanced level. The RMB exchange rate formation mechanism will be more pparent, the market can be more predictable and the exchange rate will be more flexible. The future cross-border capital flows in China are expected to remain basically stable.

Liang Hong, chief economist of CICC, also believes that the RMB exchange rate will remain stable around the basket.

To ensure a smooth pition, China will avoid large fluctuations in the renminbi and reduce offshore exchange rate differences.

The view that China will allow the yuan to depreciate after the new basket comes into force is a misreading.

It will be even more popular: "the demand for security assets of about 5 trillion and 700 billion yuan by 2020" will enable the foreign institutional investors holding SDR assets to adjust their asset allocation according to the new SDR basket. Some overseas central banks will also increase their holdings of RMB as reserve assets, which will bring corresponding demand for RMB exchange and bond investment.

In Liang Hong's view, this is a story of "small share of large volume", because the world's foreign exchange reserves now amount to US $10 trillion and 900 billion.

In fact, at the end of November last year, when IMF announced the inclusion of RMB in SDR, Singapore, Tanzania and other countries have announced that the Renminbi should be included in their foreign exchange reserves.

Since the beginning of this year, overseas institutions have increased their holdings of Chinese treasury bonds by 96 billion 500 million yuan.

For the impact of RMB basket on offshore RMB assets, the international investment bank UBS believes that the total market capitalization of the domestic stock market is nearly 50 trillion yuan (or 7 trillion and 300 billion US dollars, the market value of the market is nearly 40 trillion yuan), and the total market value of the bond is 43 trillion yuan (or 6 trillion and 400 billion US dollar), while the assets held by foreign investors account for only 1-2%.

Space.

If the proportion of foreign investors holding assets is increased to 5%, that means capital inflow will exceed RMB 3 trillion.

CICC is expected to be more optimistic. According to its estimates, by 2020, the share of RMB reserves is expected to reach 7.8%, corresponding to about 5 trillion and 700 billion yuan in demand for RMB security assets.

The official basket is also regarded by all parties.

Account opening and a new starting point for financial reform.

Zhou Chengjun, deputy director of the two division of the central bank's monetary policy, said on the eve of the official basket of RMB, the renminbi will become an international financial paction currency. This means that we should further promote capital account convertibility, further open up the financial market, allow domestic investors to participate in the international exchange market, and foreign investors better participate in China's foreign exchange market. This is the proper meaning of the next policy framework for RMB internationalization, and also a challenge to the people's Bank of China.

In fact, the actions taken by the central bank last year to promote the successful incorporation of RMB into the SDR have laid the foundation for the development of RMB in the international financial system at the next stage.

Wang Tao, China's chief economist at UBS, also believes that if the renminbi can play its potential as reserve currency and increase its share of global foreign exchange reserves to 5%, this means that foreign central banks will increase their demand for RMB assets by US $425 billion.

Whether the foreign central bank will, and when and at what speed to increase the allocation of RMB assets, will depend on the availability and liquidity of the renminbi assets that can be invested, the development of domestic financial markets and hedging tools, and its judgement on China's policy, especially the exchange rate policy.

All this means that China's capital account liberalization and domestic financial reform may continue to accelerate after the RMB has officially entered the basket, rather than the end of the Yuan's formal accession to the SDR.