Posted inAsset Class in Focus

Market `underestimates’ SDR basket inclusion

The RMB fixed income market will benefit if the IMF puts China's currency in the Special Drawing Rights basket of reserve currencies, according to Raymond Gui, portfolio manager at Income Partners.

Only four currencies are in the SDR basket: the US dollar, the euro, the Japanese yen and the British pound. A decision by the IMF’s executive board next month is expected to result in RMB inclusion among the four, said Gui, speaking at the FSA Investment Forum in Hong Kong yesterday.

“The current market has underestimated the possibility for the RMB to become an SDR currency. If it does happen this November, there will be very strong support for the [value of the] currency.

“Even if the RMB gets a 5% allocation in the basket, a lot of central banks and institutional investors will find they are underweight China’s currency and start to seriously consider allocating to RMB fixed income,” said Gui, who is the sub-manager for the Nordea 1 – Renminbi High Yield Bond Fund.

`Brilliant’ RMB?

Gui, who previously held senior roles in the reserve management department of the State Administration of Foreign Exchange (SAFE) in Beijing and the fixed income department at Bank of China, believes the medium term outlook for the RMB is “brilliant” as China continues the shift to a consumer-driven economy and achieves more sustainable growth.

The short-term volatility is misunderstood by investors, he suggested, referring to the surprise devaluation of the RMB in August. The PBoC’s near 3% devaluation roiled global markets as investors took it as a sign that the government held deep concerns about slowing GDP growth.

“The major purpose of the PBoC was not to devaluate to stimulate exports. The bigger purpose in August was to change the mechanism of the USD-CNY fixed rate to make [the RMB] more market-driven and to meet IMF’s requirement for the SDR currency.”

He believes the purpose of the PBoC lies in a simple calculation.

If China devalued the currency 5-10%, exports would get a boost. However, exports account for only 5% of GDP, so a 10% improvement in net exports through a currency devaluation can only have a 0.5% contribution to GDP growth.

“On the other hand, if China devalues the currency it could easily trigger $500 billion in capital outflows, equivalent to 5% of China’s GDP.

“When the PBoC compared the 0.5% positive on exports and the 5% potential negative on GDP, it was a very easy choice.

“We have high convictions the PCoB will continue to maintain a stable RMB because that’s in the best interests of China.”


Gui also believes the government has “engineered” the economic slowdown because it’s the only way to transition from an export-led to a consumer-and-services-based economy, and “a market-driven economy and a fully-convertible currency are crucial for further growth”. 



Part of the Mark Allen Group.