IMF to grant renminbi reserve currency status, boosting profile of RMB ETFs

Dec 1st, 2015 | By | Category: ETF and Index News

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The International Monetary Fund (IMF) has announced that reserve currency status has been granted to the Chinese yuan. This will put the yuan in the same grouping as the US dollar, euro, British pound, and Japanese yen as globally accepted vehicles through which central banks and financial organisations may repay international debt. The move is symbolic of the yuan’s emerging prominence on the global stage, including the growing market for Chinese investments such as renminbi-denominated exchange-traded funds.

IMF to grant renminbi reserve currency status, boosting profile of yuan ETFs

Christine Lagarde, IMF Managing Director.

Despite earlier attempts by Chinese authorities, the IMF had previously rejected the inclusion of the yuan in their basket of reserve currencies owing to China’s intervention in foreign exchange markets to suppress the currency’s value in a bid to boost country exports.

China has however moved to allow their currency to be increasingly market driven, a move which has been noticed by the IMF. As early as March 2015, Christine Lagarde, IMF Managing Director, commented: “It’s not a question of if, it’s a question of when.” Earlier this month, she officially gave her backing for the currency’s inclusion. If the decision is made, analysts predict the yuan will officially be recognised as a reserve currency in 2016.

Although initially a symbolic gesture, the move will usher in a period of growing demand for the currency, with some analysts predicting the renminbi may rival the international recognition of the dollar and euro by 2030.

A further signal of the currency’s internationalisation has been the growing popularity of renminbi-denominated investments. Several ETF providers have launched products offering exposure to China’s A-Shares: domestically-listed renminbi-denominated stocks. Other key initiatives, such as the Shanghai- and Shenzhen-Hong Kong connects, two programmes linking the Shanghai and Shenzhen stock exchanges with the Hong Kong exchange, will further open the doors for foreign investment within the country. Although the Shenzhen-Hong Kong connect is still to be launched, the Shanghai-Hong Kong connect was established in November 2014 and allows access to Shanghai-listed stocks which generally exhibit larger market caps and greater liquidity than those trading on the Shenzhen exchange.

These ongoing developments will also go a long way in compelling leading index providers, such as MSCI, FTSE, STOXX, and S&P Dow Jones, to include China’s A-Shares within their indices, a move which will prompt heavy buying activity of renminbi-denominated shares as managers realign their tracking funds with the updated indices.

Other developments within the European investment landscape that have promoted the renminbi’s internationalisation have been the establishment of the China Europe International Exchange (CEINEX), a newly launched exchange designed to promote greater availability of Chinese renminbi financial instruments, including ETFs, to European investors. One of the first ETFs to be launched on the exchange was the Commerzbank CCBI RQFII Money Market UCITS ETF (CCMR), providing access to Chinese money-markets and therefore direct renminbi exposure.

The IMF have made it clear that ongoing analysis of China’s financial reforms will be conducted with the view to remove the reserve currency status if policymakers renege on the current progressions. Lagarde has also stated that if long-term stability of the currency is to be achieved, China will need to adapt the economic profile of the country to be aligned with slower, sustainable long-term gains. “By brewing its economic cup of tea more slowly, China will end up with a richer taste,” she said.

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