Event

The IMF has anticipatively promoted the RMB (Renminbi) by including it in its SDR (Special Drawing Rights) basket of currencies. The effective adaptation of SDR composition will take place in October 2016. Another noteworthy decision around the RMB was made a few days later when the Chinese central bank announced it will measure the RMB’s exchange rate against 13 trade-weighted currencies in the future, rather than against the sole USD. This adjustment should fuel further RMB depreciation against the USD this year.

Impact on country risk

Joining the IMF’s currency basket is largely symbolic, not only because the RMB is joining a club reserved so far for major international currencies from advanced economies, but also because it has been awarded a heavier weight than the Japanese yen or British pound. Still, this move is an extra step which acknowledges the RMB’s rising internationalisation as a reserve and payment currency. Moreover, it should encourage China’s financial reform stance notably by further opening its capital account, an expected development which is to happen very gradually and not to the same extent as in other major economies. Such an international recognition of China’s growing role in the global economy will not prevent the RMB from decreasing further this year, though. China’s economic slowdown, the narrowing interest differentials with the US – resulting from Beijing’s six rate cuts since November 2014 and the Fed’s recent resumption of rates hikes – and the resulting rising capital outflows are indeed likely to further fuel the RMB’s downward trend in 2016. As a matter of fact, the August surprise devaluation foreshadowed Beijing’s depreciation policy in forthcoming months as evidenced by the central bank’s recent announcement on RMB valuation. The latter might allow saving much decreased foreign exchange reserves and making the RMB’s future path less uncertain. However, risks of currency pressures and renewed financial instability are likely to persist in an economic landing context, together with the risk of competitive devaluations among China’s Asian competitors (e.g. Vietnam).

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com