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Limits seen to RMB internationalisation – Industry roundup: 2 June

Limits seen to RMB internationalisation as it vies with dollar

China has been boosted by the International Monetary Fund’s (IMF) recent assignation a higher weight to its currency, the renminbi (RMB). But a downbeat editorial in the South China Morning Post suggests that “the currency still has a long way to go” before it can challenge the global status of the euro and the US dollar.

The IMF announced on 14 May that it had increased the weighting of the US dollar (USD) and the RMB in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.

The decision was taken after a five-yearly review, which took the Chinese currency’s share in the basket to 12.28%. It marked an increase of 1.36 percentage points from the previous assessment in 2016, when the RMB was included in the basket for the first time with a weighting of 10.92%. That makes it the third largest, after the USD and the euro (EUR), and is an acknowledgement of the currency’s rising international use and China’s economic status.

The IMF’s latest review also saw the weighting of the USD rise to 43.38% from 41.73%, while those of the EUR, Japanese yen (JPY) and British pound (GBP) declined.

The SCMP commented that the Chinese currency is on course to internationalise both as a currency of trade and a reserve currency. “While the SDRs are not a currency per se, as synthetic monetary units, they can be exchanged for the currencies in the basket; hence the significance of the higher weight assigned to the RMB”.

But noting that the USD had also further strengthened its position in the latest IMF currency basket review, the paper suggested that it was too soon for “China’s monetary nationalists [to] start uncorking champagne”.

While the RMB had made progress at internationalisation, “Beijing’s multi-year efforts to reduce reliance on the US dollar in trade and exchange, sometimes called de-dollarisation, will face even greater obstacles,” it added

“The SDR adjustment owes in no small part to the number of bilateral currency swaps with numerous countries around the world between their currencies and the yuan. At the end of 2020, China’s central bank had swaps with 40 global central banks, including 22 economies along the Belt and Road Initiative (BRI).

“The signing of these bilateral swaps accelerated after 2013 and reflected the greater push to globalise the use of the yuan, especially along the BRI.”

The paper also noted that the RMB has yet to pose any serious challenge to either the dollar or the euro. “It accounted for a mere 2.2% of global payments in March, far lower than the 41.07% for the USD and 35.36% for the EUR.

In the rankings of global forex reserves, the Chinese currency ranked fifth with a 2.79% share by the end of 2021, a fraction of the 58.5% for the USD and 20.6% for the EUR.

The SCMP editorial concluded: “Unprecedented sanctions imposed by the US and its allies against Russia, including kicking out major Russian banks from the SWIFT messaging system for international currency settlement and freezing Russian state assets, have alarmed Beijing.

“In an increasingly complex and dangerous world, what might have been an economic and monetary issue for the RMB is now further complicated by geopolitics.”

Russia “could make dollar and euro corporate deposits less attractive”

Russia’s central bank has indicated that it could impose negative interest rates on certain dollar and euro deposits while encouraging the use of other currencies, especially China’s renminbi (RMB).

Sanctions imposed on Russia have already decreased the appeal of the two currencies, and negative rates would accelerate this trend, the bank claimed, suggesting that Moscow is seeking ways to make alternative currencies such as the RMB more attractive to use.

In its report, the Central Bank of the Russian Federation, aka Bank of Russia said that Western sanctions imposed on Russia since the invasion of Ukraine on 24 February have that frozen about half of the nation’s US$640 billion in gold and currency reserves. That action, coupled with talk of seizing the frozen assets could inspire other banks in Asia and the Middle East to re-evaluate their own foreign-exchange policies the report suggested, according to Reuters.

“One of the results of the imposed sanctions restrictions for the foreign exchange market was the tendency to increase the use of currencies alternative to the US dollar and the euro,” the report said, singling out China's currency as an example.

Moving to impose negative interest rates on dollar and euro deposits would ramp up the transition away from the two popular currencies, it added. Negative rates could hit corporate foreign exchange deposits with banks, but not retail accounts, Central Bank Deputy Governor Ksenia Ydaeva said, according to Reuters.

In the 14-week period since Russia invaded Ukraine, yuan-rouble trading volumes have jumped by more than 1,000%, an indication that China and Russia could be strengthening their ties as they look to limit the influence of the US amid rising tensions.

Three weeks before the invasion, the opening of the Winter Olympics was marked by Moscow and Beijing announcing a “no limits” friendship that was regarded as a sign that both countries aim to challenge the influence of the US over the global economy.

In March 2022, China’s trade with Russia rose by 12% year-on-year, a bigger increase than its trade with the rest of the world. In April, Russia had said it expects trade with China to hit US$200 billion by 2024, an increase of one third from around US$150 billion last year.

Deutsche Bank’s DWS unit faces greenwashing probe

The CEO of Deutsche Bank’s asset manager, DWS, is departing amid government inquiries into alleged “greenwashing” at the firm.

A day after raids by prosecutors on both DWS and its head office in Frankfurt, the bank announced that Asoka Woehrmann will step down on 10 June

The raids and Woehrmann’s departure are seen as a further setback for Deutsche Bank, which is DWS’s majority owner, which has been trying to move on from regulatory breaches, including money laundering and securities mis-selling that have resulted in heavy fines and triggered Tuesday’s raids by German prosecutors.

They have been investigating reports and allegations made by a whistleblower that DWS had exaggerated the green credentials of investments it sold — a practice known as greenwashing. DWS has repeatedly denied that it misled investors.

Woehrmann told employees in a memo that it was a joy to see DWS flourish but that “allegations..., however unfounded or undefendable, have left a mark.”

“To quote Charles Dickens: it was the best of times, it was the worst of times,” he added in the memo, which was seen by Reuters.

Earlier this week, German prosecutors said that “sufficient factual evidence has emerged” to show that environmental, social and governance (ESG) factors were taken into account in a minority of investments “but were not taken into account at all in a large number of investments,” contrary to statements in DWS fund sales prospectuses.

The US Securities and Exchange Commission and German financial watchdog BaFin last year launched separate investigations into the allegations made by the whistleblower, a former head of sustainability at DWS, who said that the company overstated how it used sustainable investing criteria to manage investments.

Deutsche Bank said that Stefan Hoops, who has headed its corporate banking division since 2019, will replace Woehrmann from 10 June.

Quantitative tightening era underway in US

The beginning of so-called quantitative tightening (QT) commenced in the US on Wednesday as the Federal Reserve lets bonds mature off its US$9 trillion balance sheet without replacement.

The move follows nearly three months after the Fed conducted its final open market purchase on 9 March, effectively ending its Covid-19 quantitative easing (QE) programme begun two years earlier as coronavirus cases began to mount.

Over the two years March 2020 to March 2022 the central bank conducted unprecedented bond purchases, which aimed to ease the economic impact of the pandemic. The change of  policy from QE to QT comes at a time when the Treasury market is already grappling with periods of volatility and low liquidity, and there are many unanswered questions about the effects of the new policy regime.

Analysts say that yields should technically move higher in response to QT, while the curve should steepen, due to a tightening of financial conditions and money supply. However, the direction of yields is also highly dependent on other economic factors, such as expectations of further Fed interest rate hikes, the US economic outlook or greater regulatory constraints. Others feel that any outsized impacts will rather show up in money markets or financial market plumbing, or that effects on liquidity are at least a few quarters away.

“It’s going to be very gradual,” Subadra Rajappa, head of US rates strategy at Société Générale told the website Seeking Alpha. “It’s just too soon to know what if anything the impact is going to be from QT.”

“I don’t think we know the impacts of QT just yet, especially since we haven’t done this slimming down of the balance sheet much in history,” added Dan Eye, chief investment officer at Fort Pitt Capital Group. “But it’s a safe bet to say that it pulls liquidity out of the market, and it's reasonable to think that as liquidity is pulled out, it affects multiples in valuations to some degree.”

The QT era gets underway as the US experiences the highest inflation rate in 40 years, which triggered a rare meeting between President Biden and Fed Chair Jerome Powell on Tuesday.

US Treasury Secretary Janet Yellen, who previously served as Fed Chair under the Obama administration, was also at the meeting, but later admitted that she “was wrong about the path inflation would take” and that it would not pose a long-term problem.

“There have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly,” said Yellen. “At the time I didn't fully understand, but we recognise that now."

India ‘on course for 7.5% growth in 2022-23”

India’s gross domestic product (GDP) will grow at 7.5% in the financial year to the end of March 2023, up from an earlier projection of 7.3%, helped by a better statistical base and continued credit growth but there are “significant uncertainties” regarding the estimates, says State Bank of India’s (SBI) research unit.

In the group’s latest report, its chief economic advisor Soumya Kanti Ghosh says that the real GDP will incrementally increase by ₹11.1 lakh crore (approximately US$150 billion) in FY23, which translates into real GDP growth of 7.5% for the year, the report adds.

SBI expects the Reserve Bank of India (RBI) to be supportive of growth by only gradually hiking repo rates, but mostly frontload it in June and August with a 50 basis points repo hike and 25 basis points cash reserve ratio (CRR) hike in the forthcoming June policy

SBI's growth projections tally with those of the central bank. In April the RBI forecast that GDP would grow at 7.2% in FY23. However, the Finance Ministry has said that rising crude oil prices could undermine India’s aim to achieve even higher GDP of 8% in FY23.

International organisations like the International Monetary Fund, the World Bank and the United Nations had previously projected India's GDP FY23 growth at 8.2%, 8% and 6.4%, respectively.

SBI Research said that India’s economy grew by 8.7% to ₹147 lakh crore in FY22, adding ₹11.8 lakh crore in real terms during the year. GDP growth for Q4 FY22 (the three months to end-March 2022) was 4.1%.

In FY22, around 2,000 listed Indian corporates, in listed space, reported 29% growth in top line and 52% growth in profit after tax (PAT) over the previous year, shows the SBI assessment. “Construction sectors, including cement, steel etc., reported impressive growth numbers in both revenues as well as PAT. Both the construction and steel sector reported growth of 45% and 53%, respectively, in revenue in FY22 as compared to FY21.”

For the current financial year, order books remain strong, SBI says, adding that data for April shows increasing demand for credit across almost all industry sectors.

High government borrowing also rules out the possibility of open market operation (OMO) sale, thus a CRR increase by the RBI seems to be a possible non-disruptive option of absorbing the durable liquidity, says the report. “This opens up space for RBI to conduct liquidity management in future through OMO purchase.”

However, oil prices currently at US$120 per barrel of crude (bbl), pose significant uncertainties for the inflation trajectory, SBI says, adding that inflation could average 6.5%-6.7% in FY23 on the back of excise rate cuts by the government. Its independent forecast says oil prices could climb further before declining, but they might “still hold up at current levels for a longer period of time”.

Agri commodity hedging platform Stable gets US$60m funding boost

Stable, the self-proclaimed ‘home of hedging’ for the US$5 trillion agricultural commodity industry, has announced the close of a US$60 million Series B investment.

Founded in 2017 in Somerset, UK, Stable promotes itself as a way for businesses to “protect themselves from volatile commodity prices”. It now lists more than 500 untraded commodities that can be hedged on the platform and its clients range from multinational food and drink companies to family farms across the Americas.

The company will use the cash from the Series B to invest in new products, including a financial news aggregator and a risk management solution.

Stable’s CEO Rich Counsell commented: “Hedging is seen as complex and risky to most business owners, yet the benefits of bringing stability and predictability to an income statement shouldn’t be reserved for giant multinationals and sophisticated traders.”

The company now operates across the US, Europe and Asia, employing more than 60 commodity experts, quants and data scientists.

The funding round was led by Acrew Capital with notable investors Greycroft, Notion Capital, Syngenta and Continental Grain Company also participating. Acrew’s Vishal Lugani will join Stable’s board of directors.

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