China Currency Admitted to IMF Major Leagues: The End of U.S. Dollar Supremacy?

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager & International Strategist

On November 13, the International Monetary Fund (IMF) gave a preliminary indication that it would include the Chinese currency, the RMB, for the first time in its basket of approved reserve currencies, or Special Drawing Rights (“SDRs”). Undoubtedly, China has gained international prestige due to its partial liberalization of its capital accounts as well as its position as the second largest economy in the world after the U.S.

Does this mean the end of the supremacy of the U.S. Dollar?

60% of reserves of foreign central banks are held in U.S. Dollars.[1] Chinese RMB comprise less than 1%. While foreign central banks are likely to accumulate more RMB over time, there remains some questions as to how quickly it could rise in the near term.

First, Chinese bond markets would need to develop deeper liquidity. In order to invest in a currency, central banks would demand liquid investments denominated in the currency. Today, the U.S. bond market is magnitudes deeper than that in China.[2]

Second, it’s not in China’s best interest to immediately go to fully-free capital accounts. Exports are in decline due in part to weak global demand. The last thing the Chinese government would want to do is to put further pressure on exporter margins with a strong currency buttressed by sudden foreign capital inflows. One case in point is the August devaluation of the Chinese RMB that spooked financial markets.

While China has made progress in financial reform—partial liberalization of interest rates and opening up access to its stock markets—China has not opened up its currency to full convertibility and free capital flows.

Furthermore, recent government intervention in the stock market and economy does not provide investors assurance on long-term governance. Neither the Chinese nor the IMF can simply legislate a track record of responsible governance overnight. Time and consistency are needed to win investor confidence.

[1] http://worldif.economist.com/article/6/what-if-the-yuan-competes-with-the-dollar-clash-of-the-currencies , accessed on November 13, 2015.

[2] See http://www.wsj.com/articles/why-investors-shy-away-from-chinas-6-4-trillion-bond-market-1437593482?alg=y , accessed on November 16, 2015.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

The Future of the Yuan and its Impact on the Dollar

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager and International Strategist

The consideration of adding the yuan, or as others may refer to it more formally as renminbi (RMB), as the fifth member to the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) list has been debated for many years. However, while it is expected that China will eventually have its currency recognized by the (IMF), the question is timing of this conversion.

The recent crash of China’s stock market, combined with strong state intervention of measures that go against the grain of market liberalization, has the potential to delay acceptance of the yuan. That’s not to say that the central bank won’t want to proceed as proposed, but competing forces might gain strength in calling for a go-slow approach in making the decision.

In the near term, the adoption of the yuan would likely prompt U.S. dollar selling. China is experiencing weaker growth, and monetary policy is easing while the U.S. is stable to getting tighter. The appetite of central banks to dump dollars in favor of yuan will take time. However, over the long term, the yuan could be the major competing currency to the U.S. dollar–if China can conduct further structural reform that restores confidence in more sustainable growth.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.