Renminbi’s Reserve Currency Status: Symbolic Or Opportunity?

Foreign investors own a mere 1.7% of China’s $11 trillion onshore equity and fixed income markets, the third- and fifth-largest such markets in the world1. Today, international investors are likely to have twice the exposure to Switzerland than China in their portfolios, despite the latter having ten times the GDP2. We believe this is all about to change, as foreign holdings of RMB-denominated assets may be on the cusp of a significant uptrend spurred on by the International Monetary Fund (IMF) granting the Chinese currency its official seal of approval.

On Monday, November 30th, the IMF announced a change to the composition of its Special Drawing Rights (SDR), an elite basket of reserve currencies. Such a change has not occurred since the euro was included in 19993. SDR currencies are commonly regarded as the most stable and prevalently used currencies in the world. China’s currency, the renminbi (RMB), will now join the ranks of the dollar, the euro, the pound, and the yen as the third-largest SDR currency behind the dollar and the euro. The inclusion will commence on October 1, 2016.

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SDR Composition

SDR Weights 2005 2010 2016 Estimate
USD 44% 41.9% 41.73%
EUR 34% 37.5% 30.93%
GBP 11% 11.3% 8.09%
JPY 11% 9.4% 8.33%
RMB 10.92%

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