Internationalization of Renminbi; Journey – Pegged, re-pegged, reforms and then SDR

2016 one of the worst years of Renminbi

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In July 2005, China removed strict currency peg to dollar (of 8.2765). In 2008, the Financial crisis and appreciation of renminbi, led to china re-instituting the currency peg to Dollar (at 6.82). In 2010, once financial crisis had appeared to be subsiding, the currency peg was again removed.

After series of currency reforms and initiatives to Internationalize Renminbi over the years, in Oct 2015, Renminbi was then inducted into prestigious IMF SDR (special drawing rights) basket. This was a big milestone for China as SDR basket determines currencies that can be received as IMF loans. Inclusion in SDR (alongside Big 4 currencies – Dollar, Euro, Yen and Pound) marked a new beginning and huge milestone in the Internationalization of Renminbi.

Internationalization of a currency should mean at least two things:

  • Market linked price of the currency and
  • Currency has to be stable enough to inspire confidence among corporations and Financial Institutions to deal in the currency for flow of both International Trade and Capital.

Contradiction here is that almost at the same time when China succeeded in its years of effort to internationalize the Renminbi – forex reserves started to deplete and Renminbi started to depreciate.

Chinese forex reserves continue to fall – Expected to be below $3 tn soon

For the first time in first quarter of 2011, China crossed $3 tn of forex reserves and then forex reserves peaked at $4 tn in second quarter of 2014. Now in the beginning of 2017, for the first time since 2011, Chinese forex reserves are expected to come down below $3 tn (latest nos $3.01 tn).

Monthly out flow was as high as $107 bn in the month of Dec’15. However, the pace of this slide has come down significantly as the total outflow for the year 2016 was only about $270 bn.

2016 one of the worst years of Renminbi

From starting the year 2016 at 6.50525/USD and closing the year at 6.94880/USD, 2016 marks as one of the worst years for Renminbi on record, with almost 7% depreciation. It is noteworthy that this slide of 7% is despite of strict Capital Controls and intervention in currency market by Chinese Govt. to keep Renminbi stable.

Conclusion:

Did China not anticipate this? or maybe it did. And accepted both fall of forex (Capital flight) and Volatile currency to be short term side effects.

Or it was a master stroke they achieved two aims. One, of course Internationalization of currency for long term and two, immediate depreciation of the currency to make exports more competitive.

Whatever may be the intention of Chinese Govt., situation has gone out of hand. Because the sliding of forex reserves still continues and is expected to go on for some time. Also, given the combination of capital controls and volatility, even Internationalization appears to be a distant dream (currently Renminbi is only eighth most traded currency – less traded than even Swiss franc and Canadian Dollar and slightly more Mexican Peso).

The only and very strong defense against this volatility and capital flight could be that the period of last one and half years does not truly reflect business as usual period, other more internationalized currencies like Euro and GBP have been worse performing in the same period. But neither UK nor Eurozone tries to defend its currency with intervention in the currency market.

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