On November 30, US Eastern Time (December 1, 2015, Beijing time), Christine Lagarde, President of the International Monetary Fund, announced that the RMB would be included in the "Special Drawing Rights" basket. In October 2016 It will officially take effect on the 1st and become a freely usable currency. This marks the RMB becoming the first currency from an emerging market country to be included in the SDR basket.
The scale of two-way flows may increase, but it should not be over exaggerated
Currently, the US dollar, euro, pound, and yen account for 63.8%, 22.5%, 4.7%, and 3.8% of the global official reserves respectively. %, the RMB is around 1.1%. After joining the SDR, if the proportion of RMB in international reserves catches up to the level of the Japanese yen, the global central bank's demand for RMB assets will increase by about US$210 billion. If it catches up with the level of the pound, it will increase by about US$290 billion.
So in the short term, the RMB’s inclusion in the SDR is like a product being labeled a “well-known trademark”. After being certified by the IMF, the RMB’s international credibility will be stronger. Central banks of various countries will inevitably increase their allocation of RMB assets in their reserves, but this amount should not be over exaggerated.
The initial scale of capital outflow may be larger, and then it will become balanced
The initial scale of capital outflow may be larger, and then the inflow and outflow will not differ much. As China has gradually relaxed capital account controls over the past two years, the scale of two-way capital flows has expanded and the volatility of domestic liquidity has also intensified. From an internal perspective, China's economy is facing many structural problems and its economic growth is slowing down. In the third quarter, GDP growth exceeded 7%.
From an external perspective, the U.S. is approaching an interest rate hike, making it more attractive to international capital. In September 2015, banks had a deficit of 695.3 billion yuan in foreign exchange settlement and sales, the largest deficit since data were available in January 2010. The balance of foreign exchange accounts held by financial institutions fell by 761.3 billion yuan from the previous month to 27.4 trillion yuan, setting another record for the largest single transaction in history. Monthly decline record. This shows that the current pressure of capital outflows does exist.
However, in the medium to long term, joining the SDR will still increase the demand for RMB from foreign exchange reserve management agencies and sovereign wealth funds. So overall, considering the policymakers' intention to maintain a stable exchange rate, we do not expect that the scale of capital inflows and outflows will differ much in the future.
Impact on its own exchange rate: there will be no long-term devaluation, but fluctuations will intensify
From the perspective of RMB internationalization, joining the SDR is only an important step in the internationalization of the RMB. There is still a long way to go, and the central bank still has the motivation to maintain currency stability in order to increase the willingness of international investors to hold and use the renminbi. Therefore, the central bank will continue to intervene in the foreign exchange market to maintain the stability of the RMB exchange rate.
From an interest rate perspective, even taking into account possible future interest rate increases in the United States, China’s interest rates are still much higher than those in the United States. Looking at the 10-year Treasury bond yield to maturity, China is 3.14% and the United States is only 2.25%. Since the exchange rate reform in August, the RMB has already released some depreciation pressure, so as long as the Fed raises interest rates slowly, the short-term impact on the RMB exchange rate will be relatively limited.
However, the fluctuation of RMB exchange rate will intensify. The inclusion of RMB in the SDR means a big step towards becoming an international currency. We can imagine an extreme situation. If the international status of the RMB is close to that of the US dollar, then the Central Bank of China can be like the Federal Reserve and only care about interest rates and not the exchange rate. The higher the degree of internationalization, the smaller the country's exchange rate risk, and the weaker the central bank's motivation to intervene in the exchange rate.
After adding SDR, the central bank will be more entangled in the "impossible three-yuan paradox". Domestically, whether it is deleveraging or stabilizing growth, the central bank will need to further cut interest rates. After joining the SDR, it will inevitably have to gradually expand the opening of capital projects. To maintain exchange rate stability, the central bank will need to consume more foreign exchange reserves, which also determines the future. The central bank must make certain choices in the "impossible triangle".
Impact on the status of the US dollar: minimal impact
We believe that the addition of RMB to the SDR will have minimal impact on the status of the US dollar, and its dominant position in the foreign exchange market remains difficult to shake. First, the U.S. dollar foreign exchange market is huge, accounting for a high proportion of both foreign exchange transactions and international foreign exchange reserves. At the same time, the U.S. dollar also serves as the main settlement currency in international trade in goods and services; second, from the perspective of transaction costs, the use of the U.S. dollar As a central intermediary currency, it can significantly reduce transaction costs and produce scale effects. This is also an important reason why the US dollar can maintain and consolidate its dominant position to this day.
First of all, about 90% of the world’s foreign exchange transactions use the U.S. dollar. As a medium of exchange, it is the currency with the highest frequency of inter-bank transactions in the foreign exchange market. It also means that the U.S. dollar is a country’s government’s intervention in the foreign exchange market. , an important means of controlling exchange rates. Secondly, the US dollar is an international store of value. The currency structure of foreign exchange reserves in 2014 showed that the U.S. dollar accounted for 63.7%, while the euro accounted for only one-third of the U.S. dollar.
Secondly, from the perspective of international trade, although some European industrial countries tend to use their own currencies for export settlement, from a global perspective, especially in Asian countries, the US dollar is still the most important accounting method for world trade. unit. South Korea has a high degree of industrialization. Judging from South Korea's foreign trade denominated currency, the US dollar accounts for more than 80%. In contrast, other small economies in Asia are even more dependent on the U.S. dollar. In foreign trade, the U.S. dollar occupies an absolute dominant position.
Thirdly, using the US dollar as the central intermediary currency can reduce transaction costs, so its dominant position can be maintained and consolidated. Although the hegemony of the U.S. dollar requires the world to withstand the global risks brought about by the U.S. financial crisis, the U.S. dollar has continued to be the central currency for international exchange to this day. In theory, using one currency as the central media currency can significantly reduce the number of trading markets, and thus becomes the most natural way to save transaction costs.
Looking back at history, the rise of the euro has had an impact on the hegemony of the US dollar, but it still cannot shake the dominance of the US dollar. Especially since the European debt crisis, the US dollar's status has become more consolidated. Since its birth, the euro's exchange rate against the US dollar has continued to rise, impacting the US dollar's status as a world currency. From 2002 to 2009, the proportion of the euro's foreign exchange reserves gradually increased to 27.8%, and the squeezed proportion of the US dollar decreased, from 67.1% in 2002 to 62.1%, but it also remained above 60%.
However, since the European debt crisis in 2009, rising uncertainty has put the euro under depreciation pressure, and the proportion of foreign exchange reserves has gradually declined. In 2014, the euro's foreign exchange reserve ratio dropped to 21%, and the U.S. dollar became a "safe" currency in comparison.
Impact on the stock and bond markets: The attractiveness of the bond market has increased, and the Shenzhen-Hong Kong Stock Connect has highlighted its determination
The RMB has sprinted towards the SDR, and the domestic bond market has attracted attention
The RMB has been included in the SDR It will bring incremental funds to the bond market. If the RMB joins the SDR and becomes a reserve currency, China's bond market will have greater market capacity and better risk-return characteristics. In 2015, China's bond market grew to US$6.3 trillion, becoming the third largest onshore bond market in the world after the United States and Japan. As of June 2015, overseas institutions held 234.8 billion yuan in treasury bonds and 249.3 billion yuan in policy financial bonds, accounting for 40% and 43% of the RMB debt held by overseas institutions respectively.
As the proportion of international investors in RMB bonds increases, the capacity of the bond market will increase. As of June 2015, the investment scale of foreign institutions in inter-bank bonds accounted for about 2% of the stock of inter-bank bonds. In comparison, the proportion of treasury bonds held by overseas institutions in South Korea is about 23%, that in Japan is about 8%, and that in the United States is close to 48 %. Assuming that the GDP growth rate in the next five years is 7%, the total stock of bonds/GDP will reach 60% by 2020 (currently 56.54%), and the proportion of total Chinese bonds held by foreign institutions will increase to 5%, then the proportion of total bonds held by foreign institutions will increase to 5%. The total amount of bonds will reach 4.78 trillion, an increase of more than 4 trillion from the current level.
Gradual opening of capital accounts, accelerated launch of Shenzhen-Hong Kong linkage
The inclusion of RMB in SDR can serve as a catalyst for China’s financial reform, which will provide more channels for overseas investors to participate in mainland stocks. market. On November 17, 2014, the Shanghai-Hong Kong Stock Connect was launched. As of now, a total of 89.2 billion yuan has flowed into the Hong Kong market, a total of HK$109.7 billion. The market is also looking forward to the Shenzhen-Hong Kong Stock Connect.
As China gradually opens up its capital account, overseas investors have entered the domestic market through QFII and RQFII, foreign investors have entered the domestic market through official investment channels such as the pilot inter-bank bond market, and unofficial channels such as cross-border lending. Zhou Xiaochuan also pointed out that this year's gradual lifting of individual cross-border investments and the launch of the "Shenzhen-Hong Kong Stock Connect" to allow investors to invest more freely in domestic and overseas capital markets are tasks that must be completed.
After SDR, how many moves are left to make?
The Chinese government’s efforts to include the RMB in the SDR have undoubtedly enhanced the impetus for financial reform and also highlighted the potential of capital account opening.
Joining the SDR represents to a certain extent the endorsement of the IMF and official institutions, as well as recognition of China's growing influence in the world economy. Looking forward to China's financial reform and development in the future, three major issues such as market-oriented reform of the RMB exchange rate, international capital flow management, and the opening of the domestic bond market cannot be avoided.
The exchange rate floating range may be further expanded
The reform of the RMB exchange rate formation mechanism follows the principles of initiative, controllability and gradualness. Judging from the exchange rate reform process, the floating range of the RMB exchange rate is gradually expanding. The floating range was 0.3% in 1994, expanded to 0.5% in 2007, and expanded to 1% in 2012. On March 17, 2014, the floating range expanded from 1% to 2%. Therefore, in the long run, as the internationalization of the RMB increases, the central bank will gradually reduce its intervention in the RMB exchange rate. We predict that the fluctuation range of the RMB exchange rate may expand to 3% or even greater in the future.
In fact, the RMB exchange rate must be more flexible and elastic, reflecting the balance of market supply and demand, in order to effectively promote the formation of a reasonable value for SDR. If the RMB is still pegged only to the U.S. dollar in the future, adding the currency basket will only further increase the impact of the U.S. dollar on the valuation of the SDR, running counter to the original intention of diversifying the SDR currency basket.
Behind the expansion of the floating range is the gradual withdrawal of central bank intervention in the foreign exchange market, and the market is beginning to believe that the RMB exchange rate is close to its equilibrium level. This change means that the central bank will restructure its base currency issuance mechanism, and the momentum of base currency growth may further weaken. In the future, significantly reducing the deposit reserve ratio to increase the money multiplier will become the new normal of monetary policy.
International capital flow management, relaxing and expanding the "Q series"
Since the central bank announced the new exchange rate reform on August 11, 2015, pessimistic remarks about emptying foreign reserves were once rampant, and other The logic behind it is ridiculous. Since my country has a huge trade surplus and relatively high interest rates, the space for RMB depreciation is limited, so large-scale capital outflows are not the norm, not to mention the central bank's sufficient ability to hedge.
With the current expectation of RMB joining the SDR, according to information from all parties, the following measures for international capital flow management may be introduced in the future: 1. Officially launch the individual investor overseas plan (QDII2) and relax restrictions on Restrictions on individual cross-border investment; 2. Launch the "Shenzhen-Hong Kong Stock Connect" as soon as possible to strengthen the connection between onshore and offshore markets; 3. Allow overseas entities to issue financial products (except derivatives) in the Chinese market; 4. Further expand The participant groups, investment scope and investment quotas of QFII, RQFII and QDII may eventually change the approval system to a registration system; 5. Further upgrade the financial opening up measures in the free trade zone and expand the scope of the free trade zone experiment.
RMB high-interest currency, opening up the domestic bond market
There are also objective conditions and needs for expanding the opening of the domestic bond market: the 13th Five-Year Plan recommendations clearly point out that the proportion of direct financing should be significantly increased, and private The threshold for capital and foreign investment to enter the financial field. Moreover, compared to the stock market, the domestic bond market is less open than surrounding markets and has huge potential.
Compared with the common low interest rates, zero interest rates or even negative interest rates, the RMB is still a high-interest currency among the world's major currencies, which is very important for overseas fixed-rate product investors, especially central banks, pension funds, insurance companies, etc. Long-term institutional investors are more attractive.
On the one hand, we can consider relaxing the threshold for foreign investors to enter China's interbank market, especially the bond market. Introducing high-quality overseas institutions to issue bonds domestically will help improve the yield curve of RMB bonds and enrich domestic bond investment products.
On the other hand, we can consider canceling the approval of foreign debt scale. my country has always implemented scale management of foreign debt: the scale of foreign debt of foreign-funded enterprises must not exceed the "betting gap" (the difference between registered capital and total investment), while domestic-funded enterprises need to obtain foreign debt indicators approved by the National Development and Reform Commission or the State Administration of Foreign Exchange. In May this year, the National Development and Reform Commission canceled the approval of quotas for companies to issue foreign debt. Both the central bank and the State Administration of Foreign Exchange began piloting macro-prudential management of foreign debt in February this year (in three regions: Zhongguancun in Beijing, Qianhai in Shenzhen, and Zhangjiagang in Jiangsu).
Now that the U.S. dollar is expected to rise in interest rates and appreciate, relatively speaking, rational companies will not have the urge to foreign currency their liabilities, so even if the quota is relaxed, they are not willing to use U.S. dollars for financing. Foreign debt liabilities have surged and The risk of foreign debt getting out of control is relatively small. This is a good time for us to reform the approval of foreign debt scale.