On Monday, 30 November, the International Monetary Fund (IMF) announced that China's currency, the yuan, will be added to the reserve currencies basket under special drawing rights (SDR). The IMF's basket of reserve currencies currently includes just the US dollar, euro, yen and pound. The IMF's chief, Christine Lagarde, called this "an important milestone in the integration of the Chinese economy into the global financial system", saying that, since the yuan now meets all criteria for the reserve currencies, it should become part of the basket from 1 October 2016.
But what does this mean for corporate treasurers? Here are some of the ways this could affect treasurers around the world:
- To comply with IMF criteria for the reserve currency basket, China must continue to loosen its control on the yuan exchange rate. That means there could be more volatility in the USD/RMB exchange rate up ahead and corporate treasurers will have to factor this into their FX risk management strategy.
- The RMB's introduction to the IMF basket is good news but it doesn't mean that the currency is completely free of capital controls. In fact, some capital controls are expected to remain in place until 2020, only then will the currency become more widely used in global trade. Some analysts say that the RMB's continued inclusion in the IMF basket depends on the financial reforms it makes in the coming few years.
- The percentage of global trade done in RMB will almost certainly increase. Companies in China will be more likely to invoice in RMB. It makes sense for them to do so and they face less FX exposure by doing so. Trading partners outside China can therefore expect more trade to be done in RMB.
- With more payments and contracts denominated in RMB, treasurers should think about how this will affect their currency risk profile. RMB should be added to currency hedging portfolios.
- Companies in China might will now be more likely to raise financing or borrow in RMB rather than US dollar, particularly in light of expected interest rate rises from the Fed.
- The RMB derivatives market will grow in size and become more liquid.
- The RMB is likely to be used more often in global cash concentration structures.
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