Tuesday, November 17, 2015

China: IMF Executive Board to decide on RMB inclusion in the SDR basket - Nomura

FXStreet (Delhi) – Research Team at Nomura, suggests that after the IMF Managing Director Christine Lagarde issued a statement late Friday that the IMF staff had proposed that the Executive Board include RMB in its Special Drawing Rights (SDR) basket, the IMF’s Executive Board approval, should it be forthcoming, is likely to be unconditional.

Key Quotes

“Separately, in a teleconference with China’s Vice-Premier Wang Yang, US Treasury Secretary Jack Lew said the US would support RMB inclusion if it meets the IMF’s existing criteria. With similar support previously expressed by various IMF members, it is now most likely that RMB will be included in the SDR basket, which was already the consensus view prior to the IMF’s Friday statement.”

“In this scenario, a rapid near-term increase in capital inflows is unlikely in our view, although gradual capital inflows should be the theme over the longer term, as global FX reserves reallocation takes place.”

“We also believe that reserve managers and sovereign wealth funds may exercise a certain amount of caution before investing in RMB assets because of concerns over China's economy and financial market valuations stemming from the Chinese government's multi-market intervention.”

“After SDR inclusion, we believe it is likely that the People’s Bank of China (PBoC) could gradually step away from FX intervention to allow for a more market-determined exchange rate. In the unlikely event that the IMF denies RMB entry into the SDR basket, there is some concern that Chinese authorities may change their current stance in keeping USD/RMB stable.”

“In the run up to the 30 November meeting, the risk is that the PBoC attempts to converge the onshore and offshore FX rates again – the central bank has in the past highlighted “the formation of a single exchange rate in both onshore and offshore markets” to facilitate RMB inclusion in the SDR.”
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