A pivotal week in the world financial markets lies ahead. We kick off today with the IMF’s decision on giving the Chinese Yuan the “Fisher Price” (safe to play with) stamp of approval on inclusion as a component in the Special Drawing Rights (SDR) basket (aka reserve currency status). The delta is high on a yes result, given previous carping by Legarde et al, with the most likely weighting being 14% (USD is 41.9%). On the trade importance metric, China get a large check mark, with 12% of global trade. The qualification metric of being “freely usable” has been cut with an unknown substance to read “widely traded in the principal exchange market”. It appears China will get a participation trophy reflecting its’ size (2nd largest economy at US$ 10.4 tln. equiv. vs. $17.4 tln for the USA) and economic reforms made to date (i.e. partial elimination of capital controls).
While this pivotal decision could attract upwards of US$1 tln to the Renminbi (people’s currency) over time, China macro is a tad cray cray at present, leading some leading houses to estimate near term inflows as low as +US$40bln on a yes vote.
Even the CNY (onshore Yuan) bulls thinks it depreciates by 3-6% vs. USD over the coming year. The bears see CNY off by 17% from current levels by the end of 2016 (7.50 vs. 6.3944 as at 30/11/15). Plenty of information on the interweb about CNH (offshore Yuan), but suffice it to say CNH is on its’ back foot for the foreseeable future. It trades 570 pips back of CNY at 6.4515 and is presently looked at as the canary in the coal mine wrt further PBoC easing measures when it trades >450 pips cheap to CNY. CNH was a popular carry + appreciation trade for several years running but those days are over. The Dim Sum bond market stands at US$500bln equiv. remains small in relation to the onshore bond market in China (120% of GDP). Rates in China are at 4% with inflation running at 2%, hence the scope for further easing is world leading (assuming negative rates in Europe lose steam at -0.65%).
Less than 5% of Chinese nationals hold a passport, versus 40% in the US. 15-20mm more Chinese passports are issued every year. The stories of global real estate being Dysoned up by Chinese investors will likely continue unabated (NYC, London, Paris, Vancouver, Sydney & Christchurch). UHNW Chinese want lower beta investment strategies in currencies other than CNY. The impetus is likely not purely on an asset allocation metric, based on return profiles, but rather on the near term risk of wealth confiscation. The on-going anti-corruption, anti-graft investigations are far reaching.
A betting man would wager that, at least in the near term, the “I Yuan out” camp wins out. JCGIf you enjoy the content at iBankCoin, please follow us on Twitter