RMB “into the basket” helps Chinese companies go out

At present, the European economy is in a downturn, the US economy is unique, and the US dollar still maintains a dominant position. At this time, the RMB joins the SDR basket, which is conducive to improving the global international monetary system and maintaining global financial stability. It is conducive to enhancing China’s financial voice and safeguarding reserve assets. Safety and promoting the two-way application of the renminbi should not be ignored.

On November 30th, the IMF announced that the RMB was officially included in the Special Drawing Rights (SDR) currency basket, and the weight ratio exceeded the yen and the pound. It was located behind the US dollar and the euro and became the third largest currency in the SDR basket. In my opinion, the successful entry of the RMB into the SDR is a milestone for domestic financial reforms and adjustments to the global monetary system.

Looking back at the author's 2011 "Internationalization of RMB Roadmap" article, the author proposed that in the next five years, RMB internationalization will be accompanied by interest rate liberalization, exchange rate marketization, capital account opening and offshore RMB market construction. . In April this year, the author mentioned in the article "SDR opens the road to the international reserve currency of the renminbi" that the possibility of joining the SDR basket this year is greater. Once successful, more and more countries will use the renminbi as a reserve currency. Achieve the goal of internationalization of the RMB ahead of schedule.

In my opinion, it is of great strategic significance for the RMB to enter the SDR basket at this time. Externally, it will help accelerate the confidence of overseas holdings of the renminbi, enhance the international influence of the renminbi and further accelerate the process of the renminbi becoming an international reserve currency. Internally, it is expected to continue to promote the convertibility of capital projects, improve the RMB exchange rate formation mechanism, and accelerate the process of financial and related supporting reforms. However, the author finds that the current view despise the significance of the RMB joining SDR. There are several misunderstandings that need to be treated calmly:

Myth #1: The entry of the RMB into the basket is only symbolic, and the actual meaning is very limited.
Many people believe that the SDR is only the IMF's accounting unit. Since it cannot be directly used for international trade payment and settlement, the RMB entry is only symbolic, and the practical significance is very limited. However, in my opinion, the above judgments despise the milestones of the RMB's participation in SDR on domestic financial reforms and changes in global financial markets. In fact, President Zhou Xiaochuan published the article "Thinking about reforming the international monetary system" as early as 2009, proposing that the outbreak of the 2008 financial crisis reflected the inherent flaws and systemicity of the US dollar-based international monetary system. risk. That is, the Triffin problem still exists, and the reserve currency issuer cannot ensure the stability of the currency while providing liquidity to the world.

In view of the above considerations, the People's Bank of China has actively promoted the internationalization of the RMB since the financial crisis, supplemented by various reforms such as interest rate liberalization, exchange rate marketization, capital account opening, and offshore RMB market construction. Considering the current economic downturn in Europe and the US economy, the US dollar still dominates. The US dollar still maintains a monopoly. At this time, the RMB joins the SDR basket, which is conducive to improving the global international monetary system and maintaining global financial stability. It is conducive to enhancing China's financial voice and safeguarding China's financial voice. The importance of reserve assets and the cooperation of the “Belt and Road” to help Chinese enterprises go global and promote the two-way application of RMB should not be ignored.

Myth 2: The RMB has joined the SDR to overdraw the reform expectations in advance, and the pace of reform has slowed down in the future.
Undoubtedly, in order to win the renminbi to join the SDR, China's financial reform has been moving at a relatively fast pace in the past five years. In particular, the Chinese central bank has further adopted targeted reform measures in response to the IMF's proposal for the renminbi to enter the basket.

For example, on July 14 this year, the central bank announced that foreign central banks, international financial organizations, and sovereign wealth funds can use the RMB to invest in the interbank market, which helps foreign central banks to hedge the risk of the yuan as a reserve currency. On August 11, the central bank adjusted the RMB exchange rate. The price has made the RMB exchange rate formation mechanism move toward marketization. On October 9, the Ministry of Finance announced that it will issue three-month book-entry discounted government bonds on a weekly basis from the fourth quarter to further pave the way for SDR interest rate pricing; October 24 On the same day, while the central bank lowered the RRR and cut interest rates, it no longer set a floating ceiling for deposit interest rates for commercial banks and rural cooperative financial institutions, marking the final leap of interest rate liberalization reform.

In my opinion, the addition of the RMB to the SDR basket is an affirmation of the results of previous financial reforms, but it does not mean that the road to reform will be stagnant in the future. In fact, the road to the renminbi to open the international reserve system needs to accelerate reforms, such as financial reform, further improve the monetary policy framework, promote capital account convertibility, improve the RMB exchange rate formation mechanism, and vigorously develop RMB-related financial instruments to expand the scope of application of the renminbi. At the same time, domestic related supporting reforms are also indispensable, such as state-owned enterprise reform, decentralization and decentralization, legal system construction, etc. After all, only accelerated reform can better adapt to more open markets and avoid financial risks.

Myth #3: The weight of RMB in the basket is only 10%, and the proportion is lower than expected.
According to the new formula published by the IMF, the weights of the currencies in the SDR basket are: 41.73% of the US dollar, 30.93% of the euro, 10.92% of the yuan, 8.33% of the yen, and 8.09% of the pound. Many people believe that the renminbi is only one-tenth, and the proportion is lower than the previous one-quarter.

In the author's view, the renminbi is included for the first time, surpassing the yen and the pound, ranking third, and has already expressed the IMF's affirmation of the widespread use of the renminbi over the past five years. Of course, considering that there is still room for further adjustment in the future, it is expected that after five years of continuous internationalization of the RMB, it will not be difficult for the RMB to further reach a level of 14%-15%. However, the author believes that this proportion is very reasonable and is already a major positive for the renminbi. There should be no excessive negative interpretation.

Myth 4: After the RMB is put into the basket, the RMB will depreciate sharply.
As early as August 11 this year, the central bank started the exchange rate middle price reform, and the renminbi depreciated. Afterwards, the exchange rate market was gradually stabilized due to the intervention of the People's Bank of China. All along, there is a view that once the renminbi has joined the SDR, the devaluation of the renminbi will be released again, and the renminbi will depreciate by more than 3%. I disagree with this view.

As mentioned above, in my opinion, the entry of RMB into SDR is the beginning of the RMB becoming an international reserve currency. Some institutional arrangements, such as the opening of capital projects, the reform of exchange rate and interest rate marketization, and the two-way flow arrangement of RMB, will enhance the future. The international status of the renminbi. Once the renminbi depreciates sharply, it will not be beneficial to exports at the time of the global economic downturn, and it will easily lead to a herd effect, resulting in a final depreciation exceeding expectations, triggering a large outflow of capital and hitting the global economy. The Chinese central bank will certainly not allow this to happen. .

Looking forward to next year, the trend of the renminbi also needs to consider the US monetary policy and the trend of the US dollar. In the author's view, the dollar is now stronger, and the US dollar index has already reflected the interest rate hike expectation at around 100. From a fundamental point of view, the US economy is improving in the short term, but mainly relying on real estate, financial promotion, shale gas and other energy industry investments, export industries and manufacturing industries can not afford too strong US dollars, so I expect 100 is the stage of the US dollar At the top, raising interest rates next year will not be a big step. Under the slight appreciation of the US dollar, it is expected that the renminbi will weaken slightly against the US dollar. It is a high probability that the currencies of other currencies will remain stable.

Myth 5: China is facing a large-scale capital outflow risk.
In the author's view, the acceleration of the internationalization of the RMB will indeed lead to an increase in the two-way volatility of the renminbi. This means that while the financial market continues to be open in the future, it is important to prevent risks.

According to the IMF's assessment of the free use of the renminbi, as of 2014, the renminbi has reached 1.1% of the official foreign exchange assets, ranking seventh; in terms of international banking liabilities, the renminbi accounts for approximately the total size of international banking liabilities of BIS statistics. 1.9% of the rankings; in terms of international bonds, the world's share of RMB-denominated bonds is about 0.6%, ranking eighth; in terms of global foreign exchange market volume, the proportion of RMB is about 1.1%, ranking ninth.

Looking into the future, along with the improvement of the international status of the RMB, the author expects that central banks will take the lead in increasing the reserve of RMB assets. Considering that the current RMB has accounted for 1.1% of the official foreign exchange assets, if the future 5-10 years, this proportion will increase to 4%-5% will drive central banks to increase demand by 40-500 billion US dollars. With the opening of capital projects and the increase of RMB financial derivatives, the motivation of overseas investors to hold RMB will also increase. The expansion of two-way flow channels is a good thing for stable capital outflows.

In short, in my opinion, the successful participation of the RMB in the SDR currency basket is not only a positive affirmation of the international financial reform and the internationalization of the RMB, but also a milestone for promoting the reform of the global monetary system. It should not be underestimated. Looking into the future, the promotion of the international status of the renminbi is an opportunity and a responsibility to ensure that the Chinese economy does not experience a cliff-like decline. From the supply side, it will emerge from the overcapacity and prevent financial risks. It will be important for Chinese leaders in the next five years. Task. (The author of this article: Ph.D. in Economics, currently Managing Director of Mizuho Securities Asia, Chief Economist. Visiting Professor of School of Economics, Fudan University, member of the 50-member Forum of China New Supply Economics.)

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