The speed of the renminbi’s worldwide adoption as a bona-fide reserve currency depends entirely upon the development of more open-market regulations in China, according to Fitch.
In a 3 October statement, the prominent rating agency said that the global financial system’s embrace of the renminbi as an International Monetary Fund (IMF)-approved Special Drawing Rights (SDR) currency – a status that took effect on 1 October – will hinge upon the extent to which central banks view it as a viable store of liquidity and value.
Only a further opening up of China’s capital account would help to promote that view among central bank leaders, Fitch explained.
The agency noted that some relevant reforms had emerged over the past year, such as foreign institutions – particularly central banks – receiving improved access to China’s onshore capital markets.
However, it pointed out, “full convertibility of the currency remains some way off, as the Chinese authorities only aim to lift capital controls by 2020”.
Meanwhile, it stressed, “a large-scale shift into renminbi-denominated assets by global reserve managers is likely to be hampered by persistent doubts over China's prospects for a smooth and orderly macroeconomic rebalancing”.
Fitch released its statement just days after downgrading China’s sovereign credit rating from AA- to A+.
It asserted that the decision by the IMF to include the renminbi in its SDR basket – putting the currency in the same league as the pound, euro, US dollar and Japanese yen – would have no immediate effect on China’s credit rating.
Nonetheless, it explained, the IMF’s separate decision to place the renminbi in its Currency Composition of Official Foreign Exchange Reserves (COFER) survey “implicitly bestows it with reserve-currency status, which could provide support to China’s rating profile over the medium term”.
COFER includes all of the SDR currencies, along with the Canadian dollar, Australian dollar and Swiss franc.
Fitch continued: “We will not know with certainty the size of central banks’ holdings of renminbi-denominated assets until the next COFER survey is released in March 2017, based on end-2016 holdings.
“However, an ad-hoc survey conducted by the IMF in early 2015 suggested that holdings of renminbi-denominated assets by central banks have grown rapidly in recently years.”
The agency said that the IMF poll identified around $75bn in renminbi-denominated foreign-currency assets held by reserve managers across 38 countries or jurisdictions in 2014: equivalent to 1.1% of total, reported holdings.
It added: “This was larger than holdings of the Swiss franc (0.23%), but still below non-SDR reserve currencies, such as the Canadian dollar (1.99%) and Australian dollar (2.11%) and considerably lower than the other SDR currencies.
“The US dollar, for example, accounted for more than half of global reported reserve assets, while the euro accounted for about 18%.”
Echoing Fitch’s general views of the renminbi, Eswar Prasad – former chief of the IMF’s China division, now author of Gaining Currency: The Rise of the Renminbi – told the Wall Street Journal: “The SDR inclusion has catalysed certain changes in China.
“Yuan is on its way to becoming an international currency – and it could become a significant reserve currency if China continues with the economic and financial markets reforms.”
However, catching up with the dollar is another matter. “That would require much more fundamental, legal and institutional reforms,” Prasad added, “and none of those are on the table.”