Renminbi Not a Reserve Currency

The Renminbi is not a reserve currency yet. The International Monetary Fund (IMF) has delayed until September 2016 a decision to include the Renminbi in the basket of currencies that uses according to The Financial Times. China´s bid for global reserve currency status is part of effort by China to increase its international clout.

The International Monetary Fund has decided that China’s currency will not be included in a basket of reserve currencies for at least a year, delaying a move some had expected to take place as soon as January even as it took pains to stress the decision was largely procedural.

The decision depends on the IMF determining just how “freely usable” the tightly controlled Chinese currency has become. The push for inclusion has been driving a series of reforms by Beijing, which is keen to see the renminbi labelled a reserve currency alongside the dollar, euro, yen and sterling.

The decision by China to let the Renminbi float more freely in the market may have been an attempt to impress the IMF although more likely than not China simply wants a weaker Renminbi to help exports and prop up a slowing economy. Eventually the Renminbi may well be one of the reserve currencies. What does that mean, especially for Forex traders?

An Internationalized Chinese Currency

Part of the reason that the Renminbi is not a reserve currency is that China has a tight hold on its currency, even after loosening up a bit. The global reserve currencies (USD, Euro, Yen, GBP) all float in the Forex market. To attain reserve status China will need to let the Renminbi float like the others and that will provide opportunity for Forex traders. However, for now traders will have to do with a managed float according to CNBC.

Recent actions by China’s central bank have cemented a new reality for traders: one where bets for yuan depreciation go head-to-head with government stabilization efforts in a new “managed float” regime.

On Friday the People’s Bank of China (PBoC) snapped a three-day streak of weaker yuan fixings, setting the currency at 6.3975 per dollar versus the previous close of 6.3990, after officials effectively quashed expectations for continued currency falls at a press conference on Thursday.

Friday’s stronger fix was the latest sign of just how serious PBoC officials are about preventing extended depreciation, traders said. Late on Thursday, Reuters reported that the PBoC asked state banks to buy more yuan on its behalf for a second straight day.

This may mean the spell of aggressively weaker fixings is over, for now, at least.

The Renminbi is still not a reserve currency and the coming months will tell us just how well China will be able to avoid continual currency manipulation and price fixing in order to gain reserve status. In the meantime traders will need to keep an eye on actions of People’s bank of China to see where the Chinese currency is going next. The major driver here is the slowing Chinese economy.

The Fall of the Chinese Stock Market

One of the markets of a slowing Chinese economy is the state of its stock market. Bloomberg Business reports on the Chinese stock rout.

China’s stocks slumped to a two-week low as concern a slowing economy and weaker currency will spur capital outflows outweighed prospects for more state support.

The Shanghai Composite Index dropped 3.4 percent to 3,664.29 at the close, the lowest level since Aug. 6. About 17 percent of mainland-listed shares remain halted. The Hang Seng China Enterprises Index sank 2.3 percent to a 10-month low, while the Hang Seng Index closed within three points of entering a bear market.

July economic data from China showed industrial output, retail sales and fixed-asset investment all trailed analyst estimates. Yuan positions at the central bank and financial institutions fell by the most on record last month, a sign capital outflows have picked up.

The fate of the Renminbi as a reserve currency depends on the willingness and ability of the Chinese to let their currency float with the market. The main driver here will be how well China handles its slowing economy without creating a set of hard landings in stocks, real estate and social stability.