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Friday, December 4, 2015, 08:51

RMB assets the darlings after IMF vote

By Emma Dai in Hong Kong
RMB assets the darlings after IMF vote
The renminbi’s inclusion into the International Monetary Fund’s basket of Special Drawing Rights will boost demand for re nminbi assets, but the supply of dim sum bonds is expected to remain soft in the short term amid a weak outlook for the currency. (Roy Liu / China Daily)

The International Monetary Fund’s (IMF) crucial vote to include the renminbi in its basket of reserve currencies will propel demand for renminbi assets from both the public and private sectors, but the supply of dim sum bonds will remain soft in the short term amid a weak outlook for the currency, coupled with affluent domestic liquidity, according to Standard Chartered bankers.

The conviction is that close to $80 billion in global foreign-exchange reserves will be reallocated to renminbi assets in the next five years.

Jeremy Amias, global head of financial institutions at Standard Chartered Bank, said on Thursday the IMF executive board’s decision Tuesday to include the renminbi in its Special Drawing Rights (SDRs) reserve basket is “a further endorsement” of the redback.

The move will not only boost asset allocation demand from global reserve managers, but also the appetite for yuan-denominated assets from real money investors, such as pension funds, the wealth-management sector and insurance companies.

“We expect the authorities to release more quotas quickly so that the (market access) barrier will continue to come down,” Amias said.

But, imminently, capital inflow into yuan assets as a direct effect of the currency’s SDR inclusion will be “relatively small”, said Becky Liu, senior rates strategist at the bank.

Based on the renminbi’s 10.92-percent weighting in the SDR, she foresaw an inflow of more than $60 billion in the coming months — from central banks and multinational organizations such as the World Bank and various development banks with benchmarks against the SDR.

The renminbi’s inclusion in the IMF’s basket of reserve currencies, which also include the US dollar, euro, the Japanese yen and the British pound, will come into effect on Oct 1 next year.

Liu pointed to what she called the “great potential” for renminbi’s share to grow in global foreign exchange reserves, given it accounts for only 1 percent at the moment.

“We see $78 billion of global foreign-exchange reserves reallocating to renminbi assets in the next five years,” she said, adding that foreign ownership in the onshore renminbi bond market is still less than 2 percent, compared with up to 60 percent for the other SDR currencies.

At the same time, the valuation of Chinese government bonds (CGBs) is quite attractive, Liu said. “At the short end of the curve, CGB yields are 200 to 300 basis points higher than all the others, whereas at the long end, the yield pickup is between 80 and 200 basis points.”

However, the momentum for the primary offshore renminbi bond market, or dim sum bonds, has been weak since the fixing rate reform in August, with outstanding dim sum bonds reaching 785 billion so far — just 1 percent higher than in the beginning of the year. Year-to-date, the gross issuance of dim sum bonds stands at 373 billion, which is 35 percent lower than the full-year record for 2014.

“We expect dim sum issuance to be light in the coming months on declining corporate bond offerings,” Liu said, adding that, due to “flush domestic liquidity”, corporations have been issuing cheap bonds onshore and buying back dim sum bonds. But she believes that offshore liquidity stress is “at its peak” because mainland outbound investment under relaxed capital account control will ease the tightness.

Expecting US interest-rate hike to start this month and the European Central Bank to continue asset purchasing, Eddie Cheung, foreign exchange strategist at Standard Chartered, forecast that the offshore renminbi will depreciate against the greenback and hit the bottom in the first quarter of 2016.

However, Cheung believes the US dollar is likely to weaken later, given that the rate-hike cycle is expected to be the slowest, along with economic recovery in the rest of the world. As a result, Standard Chartered has targeted the redback at 6.42 yuan per dollar by the end of next year.

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