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China: Yuan’s SDR inclusion is structurally positive – Deutsche Bank

FXStreet (Delhi) – Research Team at Deutsche Bank, notes that following the SDR inclusion of the RMB on Monday, our China economists argue that the inclusion is a structurally positive development for China and the global economy.

Key Quotes

“On China front, the most significant macro implication is on reform outlook. The progress of structural reforms has been slow. There is doubt among investors if China truly has the commitment to market oriented reforms. Such doubt heightened in the summer after what happened in the equity market.”

“The SDR inclusion may work as a catalyst to boost the momentum of reforms in China. It indicates that the authorities are keen to integrate China's economy further with the global economy. This will likely help to better align China’s domestic market operations with international best practices. The size of capital inflows in the short term may not be high, as the SDR inclusion itself will only start effectively on Oct 1 2016. But China has opened its fixed income and foreign exchange markets to foreign central banks and sovereign wealth funds this year.”

“A key constraint to inflows is that the domestic market is not ready for foreign reserve managers yet. Infrastructure needs to be set up, liquidity condition needs to improve, and rules need to be revised to facilitate trading. This will take time, but we have no doubt it is doable.”

“We maintain our view that the Chinese government will not allow sharp RMB depreciation in the rest of the year. We believe the PBoC may want to wait for the Fed to hike rate first and see how risks in the emerging markets evolve, before it takes the next move on the exchange rate.”

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