Thursday

21st Feb 2019

Analysis

Making renminbi a world currency would not be bad for euro

  • Inclusion of China's currency in world basket would be good for investment and exports. (Photo: Shawn Clover)

Behind the facade, there has been much debate about the inclusion of the Chinese currency – the renminbi (RMB) – as the fifth international reserve currency.

Initially, Beijing hoped that, after the International Monetary Fund’s (IMF) long-anticipated November meeting, the RMB could be added into the international currency basket by 1 January, 2016.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

  • US and European portfolio managers and individual investors would like to invest more in China’s growth regions and sectors. (Photo: EUobserver)

After China’s growth deceleration, and the boom and correction of its equity markets, the Fund’s experts recommended in early August that the IMF would delay its RMB inclusion until September 2016.

The IMF meeting will take place at the end of November.

What will the decision – whatever it will be – mean to the euro?

Two-step review

The IMF inclusion decision will be based on the review of the Special Drawing Right (SDR), which the Fund created in 1969. It is an international reserve asset, which currently includes US dollar, euro, British pound and Japanese yen.

China’s first effort to have the RMB included in the SDR basket took place at the previous IMF Review in 2010. That attempt failed, due to inadequate capital account convertibility. In the era of president Xi and prime minister Li, Beijing has made the liberalisation of the capital account and the exchange rate a major priority.

The IMF review consists of two steps. The first requires that China is a major trading nation. Well, today, China is the world’s largest exporter and second-largest importer, right after the US.

But the IMF also requires the RMB to be “freely usable.” China achieved full convertibility of the current account already in 1996, but capital account restrictions do remain.

Nevertheless, reforms have accelerated and full convertibility is not necessarily required by the IMF. The Japanese yen was seen as freely usable already in 1978, two years before Tokyo eliminated its foreign exchange controls.

The IMF Review’s second step requires a final vote by the IMF board. That is the political and subjective part of the IMF procedure. In practice, the RMB needs a 70 percent majority in the final vote to become a reserve currency.

Financial repercussions

Recently, exchange rates have seen massive currency movements. Since mid-2014, the euro is down by more than 10 percent. Nevertheless, as Europe’s cyclical recovery has proved weak, the European Central Bank (ECB) recently announced it was missing its inflation target and was considering new stimulus.

The ECB chief Mario Draghi shuns euro appreciation. When the euro has threatened to appreciate beyond $1.15, the ECB has warned of more quantitative easing (QE). After the IMF’s RMB decision, Draghi will decide whether more QE is needed.

In this environment, the near-term effect of the RMB inclusion in the IMF reserve currency basket would likely be small. It involves the reweighting of the $30 billion SDR basket.

Currently, the US dollar accounts for 42 percent and the euro for 37 percent of the total, whereas the British pound and Japanese yen are about 9-11 percent each.

The long-term consequences of the RMB inclusion would be huge.

An IMF endorsement could unleash a massive, though gradual reweighting of the global $12 trillion reserve portfolio. Private investors would be likely to follow in the footprints, especially as China’s capital markets evolve and liquidity improves.

Let’s assume that the IMF reserve currency basket would include the RMB and that it would be reweighted. If, initially, Chinese currency would be about 10 percent of the total, along with Japanese yen and British pound, then the role of the US dollar would be likely to decrease to 38 percent and euro to 34 percent, respectively.

That would unleash 10 percent of the $11.6 trillion of global reserves – more than $1.1 trillion – could flow into RMB assets.

No win-lose game

Some believe that the RMB’s gain would be the euro’s loss. This stance unites those pan-Europeanists, who want more rapprochements with Washington and less with Beijing, and those eurosceptics, who mistake self-sufficiency with Fortress Europe.

In reality, the rise of the RMB is everything but a win-lose game. From Beijing’s standpoint, a healthy Europe is positive to Chinese exports and direct investment, which is why president Xi recently urged the UK to remain part of the EU.

Second, a healthy euro will support European foreign direct investments and exports in China, which is rebalancing toward consumption. Indirectly, the euro’s strength also ensures that US dollar’s unilateral monopoly in global finance will erode over time.

Third, the strength of the RMB in no way implies that currency advantages will remain in China alone. US and European portfolio managers and individual investors would like to invest more in China’s growth regions and sectors.

But the reverse applies as well. Chinese institutional investors are eager to diversify risk by internationalising their portfolios, which are still focused on the mainland.

The RMB inclusion is only a matter of time, as the IMF managing director Christine Lagarde has acknowledged. Even if China misses the cut in fall 2015, there is a high likelihood of an interim-meeting review that will grant RMB the SDR status before the next scheduled decision in 2020.

Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) a visiting fellow at the Shanghai Institutes for International Studies (China) and at EU Center (Singapore). For more, see http://www.differencegroup.net

Opinion

Behind the UK-China-EU ménage à trois

In the short-term, the UK-China 'golden decade' will be reflected in a series of multi-billion pound business deals. In the medium-term, it has the potential to make the UK China's largest offshore renminbi intermediary worldwide.

Feature

Romania enlists priests to promote euro switchover plan

Romania is due to join the single currency in 2024 - despite currently only meeting one of the four criteria. Now the government in Bucharest is enlisting an unlikely ally to promote the euro to the public: the clergy.

Opinion

Eastern Europe Matters

The foreign ministers of Sweden, Poland and the Czech Republic reflect on 10 years of the Eastern Partnership with Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine.

Stakeholders' Highlights

  1. Nordic Council of MinistersMilestone for Nordic-Baltic e-ID
  2. Counter BalanceEU bank urged to free itself from fossil fuels and take climate leadership
  3. Intercultural Dialogue PlatformRoundtable: Muslim Heresy and the Politics of Human Rights, Dr. Matthew J. Nelson
  4. Platform for Peace and JusticeTurkey suffering from the lack of the rule of law
  5. UNESDASoft Drinks Europe welcomes Tim Brett as its new president
  6. Nordic Council of MinistersNordic ministers take the lead in combatting climate change
  7. Counter BalanceEuropean Parliament takes incoherent steps on climate in future EU investments
  8. International Partnership For Human RightsKyrgyz authorities have to immediately release human rights defender Azimjon Askarov
  9. Nordic Council of MinistersSeminar on disability and user involvement
  10. Nordic Council of MinistersInternational appetite for Nordic food policies
  11. Nordic Council of MinistersNew Nordic Innovation House in Hong Kong
  12. Nordic Council of MinistersNordic Region has chance to become world leader when it comes to start-ups

Latest News

  1. Trump and Kurz: not best friends, after all
  2. EU commission appeals Dieselgate ruling
  3. 'No burning crisis' on migrant arrivals, EU agency says
  4. 'No evidence' ECB bond-buying helped euro economy
  5. Juncker: Orban should leave Europe's centre-right
  6. College of Europe alumni ask rector to cut Saudi ties
  7. EU says Hungary's anti-Juncker campaign is fake news
  8. Trump right for once: Europe should take back foreign fighters

Stakeholders' Highlights

  1. Nordic Council of MinistersTheresa May: “We will not be turning our backs on the Nordic region”
  2. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit
  3. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister
  4. Nordic Council of MinistersState of the Nordic Region presented in Brussels
  5. Nordic Council of MinistersThe vital bioeconomy. New issue of “Sustainable Growth the Nordic Way” out now
  6. Nordic Council of MinistersThe Nordic gender effect goes international
  7. Nordic Council of MinistersPaula Lehtomaki from Finland elected as the Council's first female Secretary General
  8. Nordic Council of MinistersNordic design sets the stage at COP24, running a competition for sustainable chairs
  9. Counter BalanceIn Kenya, a motorway funded by the European Investment Bank runs over roadside dwellers
  10. ACCACompany Law Package: Making the Best of Digital and Cross Border Mobility,
  11. International Partnership for Human RightsCivil Society Worried About Shortcomings in EU-Kyrgyzstan Human Rights Dialogue
  12. UNESDAThe European Soft Drinks Industry Supports over 1.7 Million Jobs

Join EUobserver

Support quality EU news

Join us