IMF goes for Chinese

December 3, 2015 3 mins read
IMF goes for Chinese

On December 1st the International Monetary Fund (IMF) approved the addition of the Chinese Yuan to its basket of reserve currencies - used as a standard for dealing with member governments. The IMF decision is a powerful sign of just how far the Chinese economy has come in the past 30 years, and this decision will undoubtedly have an impact on markets both in Hong Kong, and here in mainland China.

For those unfamiliar with the basket of reserve currencies, it is worth noting that this is quite an exclusive club. The IMF issues assets to its members called ‘Special Drawing Rights’. These SDRs are sometimes even described as a quasi-currency, and they are currently valued against only 4 other currencies, namely: the Japanese Yen; the US Dollar; the British Pound and the Euro. The last change to the basket was the arrival of the Euro (to replace the German Deutsche Mark and the French Franc) way back in 2000. But now China’s currency will join that group of 4.

So what will this mean? Well, whilst there are some benefits from having the currency more freely available and more widely held and traded, the most obvious benefit is the symbolism of this – and of China’s final arrival to the world financial top table. This is a powerful accolade for the Chinese economy, and also strong recognition of the progress that the Chinese authorities have made in recent times to reform China’s monetary and financial systems. Christine Lagarde, the IMF chief, has agreed that the Chinese currency has met all the required criteria and so - from October 2016 - the Yuan will be invited into dinner. It’s a significant milestone.

For both the mainland of China and Hong Kong this should be helpful, since more central banks could hold the Yuan (given it will have a newly elevated status) and that would strengthen the Chinese government’s finances in Beijing, as well as pave the way for further cross-border growth with Hong Kong.

Whilst some concerns remain over the Yuan’s (some might say, artificially) low value (which clearly aids export) these fears certainly seem to have been assuaged at the IMF, and it is clear that China now truly has a fundamental role in driving the performance of the world economy. Hong Kong, of course, is uniquely positioned to take advantage here. Not just through export/import trading with her closest geographic and cultural neighbour, but also through financial links. Recent pilot schemes have greatly promoted and strengthened ties between Hong Kong and China’s capital markets, such as the Shanghai-HK Stock Connect programme (which established mutual stock market access between the two, allowing trade - in a specified range of listed stocks - in each other’s market through their own respective local securities companies). By increasing cross-border investment channels (and ease of access to those channels) the Hong Kong markets can stand strongly next to the IMF’s latest diner at the top table - and also look to feed well.

Richie Holliday
Chief Operations Officer, Asia-Pacific