World Economy

Battle for Currency Dominance Heats Up

Battle for Currency Dominance Heats UpBattle for Currency Dominance Heats Up

Yuan convertibility has been in the works for years, and is a move that could see the renminbi sideline the US dollar as the world’s primary reserve currency.

The deputy head of the Chinese Central Bank (PBOC), Pan Gongsheng, said recently that the goal is “not far away”, and some market watchers expect it as early as this year, Channel NewsAsia reported.

The PBOC has kept the yuan at 6.2 to the greenback for the past three months, making it a popular carry trade currency and its trajectory is closely related to banking and other financial reforms taking place in China.

Beijing has made clear it wants the yuan in the International Monetary Fund’s elite basket of currencies, which is currently made up of the US dollar, British pound, euro and the yen.

The latest research paper on the renminbi’s internationalization states for the yuan to reach its maximum potential active cross-border coordination and capacity building is crucial.

“It’s still small. Today, FX markets are around the $5 trillion market, the RMB probably accounts for 2.5% of that. So given, the size of the Chinese economy, given the amount of trade and over the next 3-4 years, we expect that to grow dramatically,” said Adrain Gostick, Managing Director of Thomson Reuters.

  Within Six Months

The Bank of Communications (BOCOM) International predicts full convertibility of the yuan could arrive within six months, in line with the time-frame given by PBOC governor.

It said it would undoubtedly help China’s wealth management businesses seeking more overseas investments.

“At the moment, we have RMB50-55 trillion worth of savings in bank accounts. A lot can be done,” said Hong Hao, the Managing Director of Research at BOCOM International.

“And we’ve seen in the last couple of years, a surge in wealth management products, trust fund products. They are now in the size of RMB10 trillion, and the growth is very rapid. I wouldn’t be surprised to see the demand for wealth management products continue to grow from here,” he said.

Meantime, the markets are also looking for the inclusion of Chinese equities in the MSCI indices, as well as in onshore bond indices.

The implications of these decisions and the inclusion of shares and bonds as and when they occur are expected to have a profound impact on investor allocation.