Mark Konyn, CEO Asia Pacific at RCM, a company of Allianz Global Investors discusses the future of the renminbi:
“The long term goal is for China to internationalise its currency. As such the renminbi (RMB) will be more widely used for both trade and investment, ultimately leading to convertibility on the capital account. Part of the programme of reform that will ultimately lead to full convertibility is establishing Hong Kong as an international centre for the RMB.
“There has been much discussion on what the rise of the RMB as an international currency will mean for the global financial system and whether or not the RMB will become a reserve currency at some point in the future. We believe that while China’s growing influence on the global economy and the importance of the RMB will lead to central banks considering the RMB as a reserve currency upon full convertibility, it will not replace the US dollar (USD) as the only reserve currency. This view should be seen in the context of the overall change affecting the way investors and central banks are thinking about reserve currencies more generally, impacted by changes in the pattern of global trade and the increasing need for banks and investors to diversify away from their dependency on the USD as the only reserve currency.
“The People’s Bank of China (PBOC), China’s central bank has itself hinted on a number of occasions that it too is looking to diversify its reserves away from the USD. Currently China has over USD3 trillion of foreign currency reserves with the overwhelming majority – estimated at 70% – held in USD and USD denominated securities. The Yen, Euro and sterling account for the remainder.
“Various key people in China have at times expressed concern about the value of the US dollar, and the management of the Federal budget in the context of China’s ownership of US debt. Most recently these concerns were expressed by a foreign ministry spokesmen. Fitch became the third rating agency to warn that the US could lose its top credit rating.
“It is now widely expected that China will widen the trading band for the RMB in an attempt to control the amount of hot money entering the economy. The policy initiative remains to allow the currency to appreciate gradually and thereby help stem the effects of imported inflation. Hot money entering the economy has been a challenge for the administration which has been looking to cool the economy and reduce speculation in property market and credit conditions. As a result measures to sterilise the hot money entering the economy have added to the nation’s dollar reserves which in-turn have offset attempts to diversify the reserves away from the dollar.
“We can expect to see a little more volatility in the currency as a result of widening the trading band; however the overall pressure is for the RMB to appreciate relative to the dollar in a global environment where the dollar is structurally weak due to the deficit problems in the US.”
Source : Allianz