China and the RMB

New Deference for the Renminbi

Late last month the International Monetary Fund (IMF) declared that the Chinese Renminbi (RMB) is no longer undervalued, indicating a significant shift in the organization’s public criticism of Chinese monetary policies. Speaking in Beijing during a regular review of China’s economy, First Deputy Managing Director of the IMF David Lipton said;

 

“While undervaluation of the renminbi was a major factor causing large imbalances in the past, our assessment is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.”

 

The currency has made significant strides in the past 5 years. In 2011 through early 2014, the Chinese government managed a persistent and steady appreciation of an undervalued currency, which allowed the rate of the RMB against the USD to increase at a similar rate. According to Standard Chartered Bank, the yearly use of the RMB has expanded 21 times since 2010, and the bank also predicted that 28 percent of all international trade will be dominated by the RMB by 2020. Furthermore, China’s RMB is already the world’s fifth most used currency, ahead of the AUD and CAD, which has prompted many central banks to hold it as part of their reserves. As part of David Lipton’s review last month, the currency is in the workings of becoming a part of the IMF’s Special Drawing Rights after a subsequent round of screening this November. An inclusion in the SDR, an international reserve asset created by the IMF as a supplement to member countries’ official reserves, would be the first time an emerging market currency joined the basket which comprises the dollar, the euro, the yen and the pound sterling.

 

Pushes toward a more Open Market

 

Economists at the People’s Bank of China (PBOC) and leaders of the Chinese government are keen to gain this accolade for their currency. However, as the IMF has pointed out, there must be further monetary liberalizations by the PBOC to make the RMB a free floating liquid currency. There have only been modest developments in the depth and liquidity of foreign exchange in China in the past decade, and tight controls on the RMB offer very little flexibility for currency trading. Pan Gongsheng, Vice-Governor of the People’s Bank of China however assured monetary policy reforms were underway in stating that “China is not far from realizing its goal of capital-liberalization.”

 

Further statements and new initiatives put the PBOC’s commitment to opening the capital account by the end of the year on public record. Reports show that there are new statements and measures that are aimed at creating a more market driven economy in China. Recently, the PBOC raised the interest ceiling in order to convince banks to act more competitively while creating a fluctuating interest rate. Recognizing these efforts, Mr. Lipton from the IMF shared that the international body will “share this objective and will work closely with the Chinese authorities in this regard,” while noting that the inclusion of the RMB in the Special Drawing Rights’ fund is “not a matter of ‘if’ but when.”

 

ET2C is always observing market trends in Asia. To learn more how we are using this as part of your supply chain management plan or to chat about market trends feel free to contact ET2C today.

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