Stuart P. Quint, CFA, Senior Investment Manager & International Strategist
Here are the quick takes:
- The IMF formally approved inclusion of the Chinese renminbi (RMB) into Special Drawing Rights (SDR)
- Chinese RMB will not replace the U.S. dollar (USD) in the near term
- Impact more symbolic near term, but progress will be measured over many years
The IMF formally indicated on November 30 it would include the Chinese RMB into its basket of approved reserve currencies. As stated in a previous blog, the inclusion of the RMB would appear to have limited near-term economic impact to the U.S. dollar.
Even with limited economic near-term impact, the inclusion of the RMB certainly has symbolic significance. Clearly, there is political benefit to the IMF’s recognition of the RMB in terms of enhancing China’s global prestige. The inclusion of the RMB might also serve as a carrot to deepen further structural reform as evidenced by China’s promise to have fully open capital accounts by 2020. Other countries hostile to the U.S., such as Russia and Iran, might view RMB investment as a way to hedge themselves against the risk of U.S.-led economic sanctions by conducting more trade away from the U.S. dollar.
However, the overall effects of the IMF SDR should not be overstated. The SDR is akin to a “recommended list” that cannot be enforced on central banks or markets. As an example, the weight of the USD was basically held flat at around 41%. (The new RMB weight was added at the expense mostly of the EUR). Furthermore, current holdings of central bank reserves deviate quite a bit from the SDR, with USD comprising 60% of total reserves (vs. 41% weight in the IMF SDR). For comparison, central banks hold roughly 20% of reserves in EUR (vs. 31% weight in the IMF SDR). Some central banks hold currencies such as the Australian dollar (AUD) that are not in the IMF SDR.
Major potential shifts into the RMB will take place over a protracted period of years, but here are some milestones to watch:
- Progress on further structural reform
- Deeper liquidity in local Chinese bonds
- Longer track record on responsible governance.
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, Inc., a Registered Investment Advisor.