Basket Case

Chinese Renminbi

The Chinese renminbi (RMB) is likely to appreciate in the long run, states Mexican economist Dr. Antonio Ruiz Porras.

“The most likely scenario is that the RMB will appreciate against the USD,” said Dr. Antonio Ruiz Porras, Professor of Economy at the University of Guadalajara in Mexico. Dr. Ruiz Porras explained that SDR status will lead to capital outflows that will limit China’s capacity to conduct economic policy and influence the convertibility of the renminbi to keep it weak.

So far, since the RMB inclusion in the SDR basket, the currency has experienced massive capital outflows and has depreciated slightly, falling from RMB6.7 to RMB6.9 against the USD between early October and late November. Nevertheless, the Mexican economist pointed out that the main challenge that China faces is a “likely” appreciation in the next years, since its central bank will not be able to “manipulate” its currency as it used to.

Over the years, China has artificially maintained the exchange rate of the RMB to USD to ensure that Chinese goods and products are cheaper than those manufactured in other countries. An appreciation of the RMB would impact the country’s exporting muscle, which is one of the main factors driving China’s growth at a time of overall economic slowdown.

After entering the SDR basket, the renminbi is taking its first steps to transform into a fully convertible asset, and will be the only currency in the basket that is not freely exchangeable. But obtaining this new status brings some significant gains to the Asian giant.

“The inclusion of the RMB evidences the importance of China in the exchange market and recognizes its weight in the global economy,” said Dr. Ruiz Porras in an interview with TBY. According to the professor, the RMB has the “highest transactions volume” among emerging market currencies and is the seventh most traded in the world, thus it was “necessary“ to include it in the SDR basket.

The internationalization of the renminbi, which will be fostered by the IMF, will turn the currency into an instrument of the growing power of China. If more international companies and central banks hold more RMB, China will have more influence in the global arena.

Chinese policymakers had for some time worked toward making the renminbi appealing to the IMF, which rejected its application to join the SDR basket in 2010. The importance of the renminbi, now set to surge, could threaten the dollar’s reserve status in the long run.

“There is also a question of status and politics in being part of the SDR basket,” added Dr. Ruiz Porras. Before now, the only Asian asset in the mix was the Japanese yen. Thus, the IMF’s decision evidences the growing power of Asia and emerging markets.

“The Chinese are aware of the risks that internationalizing the currency might bring to the economy, but they also see it as an opportunity to spread their influence globally,” concluded Dr. Ruiz Porras.