Hayden Briscoe
Yesterday’s announcement that China will join the reserve currency basket of the International Monetary Fund is only one aspect of a process that could channel up to US$3 trillion ($4.2 trillion) into the country, global asset manager AllianceBernstein (AB) said yesterday.
While the development is beneficial for China in the long term, the management of such large flows could cause some short- and medium term challenges for Chinese financial authorities.
“Capital flows arising directly from this development will be relatively small in themselves, at around US$40 billion,” said Hayden Briscoe, AB’s Managing Director—Asia Pacific Fixed Income.
“But it’s a symbolically important development which enhances the prestige of the renminbi as an internationally traded currency. This should help underpin China’s continuing efforts to internationalise the currency and its capital account—moves which, our research suggests, could lead to inflows of up to US$3 trillion over the next few years.
“This represents a significant portfolio rebalancing for global bond and equities investors which will have far-reaching effects on China’s capital markets and economy, as well as financial markets and currencies elsewhere.”
The International Monetary Fund announced in Washington overnight that, from October 1, 2016, the renminbi would be included in its Special Drawing Rights basket, together with the US dollar, euro, Japanese yen and British pound.
The SDR is an international reserve asset created by the IMF to supplement its member countries’ official reserves. The renminbi will comprise 10.92% of the SDR, placing it third behind the US dollar and euro (41.73% and 30.93% respectively) and ahead of the yen and pound (8.33% and 8.09%).
“A key question for investors in the short term is, ‘How will the country cope with these expected inflows?’” said Briscoe.
“We expect that, in part, the response will be for the People’s Bank of China to focus on managing the currency, as a stable exchange rate will be a key factor in maintaining some balance between capital inflows and outflows.”