June 01, 2015

Here comes the Yuan

Last week our Central Bank in Chile signed a bilateral swap arrangement for RMB 22 billion with the People’s Bank of China (PBOC). This was the 31stamong similar agreements reached by the PBOC with other central banks - (total over RMB 3.1 trillion) - but it is the first in Latin America which has included a quota   for private qualified locals wanting to invest in RMB.

The PBOC policy of bilateral central bank swap arrangements would allow the building up of Renminbi deposits in foreign central banks. Those swap deposits, according to IMF guidelines, ‘are treated as reserve assets because the exchange provides the central bank with assets that can be used to meet the economy’s balance of payments financing needs and other related purposes’.

That is why countries suffering international reserves stress like Argentina have been active users PBOC facilities, favoring trade ties with China.

Indeed, neighboring Chile is in the financial behavior antipodes of Argentina in regard to FX adequacy and external solvency. Thus, the PBOC strategy has aimed far beyond relying on FX stressed trading partners. Its target is to become an international reserve currency.

So far, it is almost there. The use of the Renminbi in money market instruments in the Bank of International Settlements increased from US$0.9 million in the 3rd quarter of 2010 to 29.56 billion in the 2nd quarter of 2014. The Renminbi is already the seventh largest reserve currency. It ranks 9th in the amount outstanding of international debt securities (East Asia Forum, Feb. 2015).

Moreover, it is known that at least 23 central banks received qualified investor status, hold RMB assets - (and/or CNH, the “off shore RMB” that is) - as part of their international reserves:
The list comprises all geographies:
·                     Australia, Hong Kong, Indonesia, Japan, South Korea, Macau, Malaysia, Nepal, Pakistan, Singapore and Thailand
·                     Austria, Belarus, Norway, France and Lithuania
·                     Bolivia, Chile
·                     Ghana, Kenya, Nigeria, South Africa and Tanzania. 
Ultimately, the RMB should reach the SDR currency status during the IMF review due this year. This after the “freedom of use” criterion as it is comprised in the set of requirements for broadening the SDR basket currencies be met - (i.e. ‘widely used’ and ‘widely traded’ clauses are satisfied).

The RMB admission as a fifth SDR currency would further consolidate current central banks diversification, strengthening demand for RMB with potentially big portfolio reallocations, some RMB appreciation and less USD-RMB correlation over time.

We should welcome the new reserve currency since transactions costs, international trade and capital movements would benefit development from the SDR status. It would be desirable that the PBOC take this new status opportunity to improve transparency on its COFER reporting to the IMF, the currency composition of their own international reserves, that is.