Renminbi joins IMF’s elite

Inclusion of the Chinese renminbi (RMB) in the International Monetary Fund’s (IMF) special drawing rights (SDR) currency basket is likely to have only a marginal impact on demand for the currency and will have no immediate effect on China’s sovereign rating, says Fitch Ratings.

However, the credit ratings agency (CRA) comments that the IMF’s separate decision to include the RMB in its currency composition of official foreign exchange reserves (COFER) survey implicitly bestows it with reserve currency status, which could provide support to China’s rating profile over the medium term.

On 1 October the RMB officially became the fifth member of the SDR basket, alongside the US dollar (USD), euro (EUR), British pound (GBP) and the Japanese yen (JPY).

SDRs are a unit of account used by the IMF. The addition of the RMB marks the first time that the number of currencies in the basket will be increased. Being part of the SDR basket will not necessarily result in a rise in the allocation of global reserves to RMB-denominated assets. Nevertheless, the IMF’s separate decision to include the Chinese currency in the COFER survey means that RMB holdings can now be treated by global central banks as official reserve holdings, which effectively grants the currency reserve status.

The RMB from 1 October joined seven currencies – the USD, EUR, JPY, GBP, Canadian dollar (CAD), Australian dollar (AUD), and Swiss franc (CHF) – in being individually reported in the COFER survey.

“We will not know with certainty the size of central banks’ holdings of RMB-denominated assets until the next COFER survey is released in March 2017 based on end-2016 holdings,” reports Fitch. “However, an ad-hoc survey conducted by the IMF in early 2015 suggested that holdings of RMB-denominated assets by central banks have grown rapidly in recently years.”

The survey identified approximately US$75bn in RMB-denominated official foreign-currency assets held by reserve managers across 38 countries or jurisdictions in 2014, equivalent to 1.1% of total reported holdings. This was larger than holdings of the CHF (0.23%), but still below non-SDR reserve currencies such as the CAD (1.99%) and AUD (2.11%) and considerably lower than the other SDR currencies. The USD, for example, accounted for more than half of global reported reserve assets, while the euro accounted for about 18%.

Fitch’s assessment of sovereign creditworthiness “captures the reality that countries whose currencies have a significant role in global official foreign-exchange reserve portfolios are less likely to experience funding stress, reflecting stable demand for assets denominated in their currency. The agency’s “reserve currency flexibility” indicator is based on empirical data reported in the COFER survey.

Based on RMB holdings at the time of the ad-hoc survey, Fitch does not expect its inclusion to have an immediate impact on China’s sovereign rating. Nevertheless, a gradual increase in holdings by reserve managers could provide support to China’s rating profile over time.

“The speed at which the RMB develops into a truly global reserve currency to rival the USD or the euro will depend on the extent to which central banks begin to see the currency as a viable store of liquidity and value,” concludes Fitch. “Such a shift is likely to require further opening up of China’s capital account. In that respect, there have been further reform efforts over the last year, such as foreign institutions, especially central banks, being given better access to onshore capital markets.

“However, full convertibility of the currency remains some way off, as the Chinese authorities only aim to lift capital controls by 2020. In the meantime, a large-scale shift into RMB-denominated assets by global reserve managers is likely to be hampered by persistent doubts over China’s prospects for a smooth and orderly macroeconomic rebalancing.”

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