Broader dimensions of Renminbi internationalisation

With the IMF holding informal talks on China's possible inclusion in the SDR basket and its board scheduled to meet on the subject in Q4-2015, this is an opportune moment to review the CNY's role as a reserve asset. 

According to Standard Chartered, "central bank (CB) and sovereign wealth fund (SWF) holdings of CNY at around USD 70-120bn - or 0.6­1.0% of global FX reserves, and assign a 60% probability to the CNY's SDR inclusion this year, as it broadly meets the technical requirements. A very high likelihood of inclusion by 2020 is seen at the latest, and a strong case for official reserve diversification into Asian currencies - and an exceptionally strong case for reserve allocation to CNY assets". 

China's markets are deep, its internal and external balances are strong, it has the world's largest FX reserves, and it is a major trading counterparty. Its assets are highly rated, and the currency has a negative correlation to broader asset-market volatility. The Markowitz mean-variance optimisation approach to building an optimal official reserve portfolio also suggests that reserve managers should boost allocations to selected G10 currencies and EM local markets - including CNY, states Standard Chartered. Looking out to 2020, the emergence of new trade corridors and intra-EM trade growth should further boost the CNY's prospective role as a major reserve currency.

Issuing a reserve currency potentially carries medium-term risks for China, as increased appetite for CNY-denominated assets could spur new debt creation. However, this more broadly as a healthy development as the global financial system - and reserve allocations - more accurately reflect the multi-polar nature of the global economy, added Standard Chartered. 

Renminbi internationalisation has been welcomed across Asia so far, but could create regional challenges over time. It disrupts the status quo of tight FX market controls in Asia ex-Japan (AXJ), it may give Chinese companies a competitive advantage in managing FX risk, and it positions China better to attract capital inflows.