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Rising Renminbi moving towards reserve currency status

Renminbi as reserve currency; highest against US Dollar in 20 years

People's Bank of ChinaI wrote this article “Debutante Chinese Renminbi has a special date with year 2015“. In my opinion, the Chinese currency is moving towards reserve currency status. So while our attention was captured by politicking in the US over its debt and government shutdown, the Chinese currency Renminbi just moved one step closer to a reserve currency.

According to China Daily,

Record high exchange rate comes amid impasse over US debt

The yuan traded stronger than 6.10 per dollar for the first time in 20 years after the central bank raised its daily fixing rate to a near record high and the nation stepped up efforts to increase the Chinese currency’s global use.

The yuan strengthened for three consecutive days and closed at a record high of 6.0995 against the US dollar in Shanghai on Wednesday amid the ongoing impasse over US debt talks, China Foreign Exchange Trade System prices showed.

 

Using Chinese Renminbi for trade bypassing the US Dollar

Experts say that for a currency to become a reserve currency it must be used for trade as well as investment. The Chinese government is signing bilateral currency swap agreements with major trading partners to use Renminbi directly for trade. At the moment, China is the world’s second largest economy by nominal GDP yet its currency is only the ninth most traded according to the preliminary results of the 2013 BIS Survey (see page 5, paragraph 1).

Bilateral currency swap agreements between countries position the Renminbi for greater use. The latest agreement was signed with the European Central Bank on 09 October. From China Briefing,

On October 9, a bilateral currency swap agreement (BCSA) was signed between the People’s Bank of China (PBOC) and the European Central Bank (ECB). The agreement is valid for three years and could be extended based on further consensus. The swap line signifies a maximum size of RMB350 billion or 45 billion euros (about US$57 billion), which will be used in supporting trade and other exchanges between China and the European Union (EU).

Till date, 22 countries have concluded bilateral currency swap agreements with China.

China currency swap agreements by country

Source: China Briefing

 

What does this mean to the currency trader / investor?

For the short term currency trader, there is probably little change as focus remains on trading majors that have plenty of volatility. Traders who are really keen can explore trading the offshore Renminbi or CNH. Spot and futures for CNH are now available with some brokers.

For a currency investor who is looking for a generational long term investment however, the Renminbi as reserve currency theme is very exciting because it could be an opportunity similar to once-in-a-lifetime-events like Bretton Woods Conference and the launch of the Euro.

And finally to share some more on this from Twitterati.

 

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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3 thoughts on “Rising Renminbi moving towards reserve currency status”

  1. Daniel Ku Guet Liang says:

    Q: “For a currency investor who is looking for a generational long term investment however, the Renminbi as reserve currency theme is very exciting because it could be an opportunity similar to once-in-a-lifetime-events like Bretton Woods Conference and the launch of the Euro.”
    1. “a generational long term investment” horizon is how long a period?
    2. Could you please elaborate “opportunity similar to … Bretton Woods conference & launch of euro”?
    3. Hypothetically, what should a common man do to capitalise on this opportunity? is opening a RMB time deposit with BOC a good choice?
    Thank you in advance.

    1. Soh Tiong Hum says:

      Hi Daniel,

      This is my opinion (not qualified investment advice in any way).
      1. I was born in the 70s. The Euro was launched on 01 January 1999. I started investing late 1998. Considering that time until now and when we can expect Renminbi to be a reserve currency, this is an investment that I consider making for my children. If my son starts investing at my age, that will be another over 20 years time before he can decide what to do with it.
       
      2. A reserve currency has room to appreciate against other currencies as because other countries use it for trade. A trade giant like China (world no.2) whose currency has not caught up (world no.9) has probably a lot of room for Renminbi to appreciate because ultimately countries and funds have to rebalance their portfolio by buying a lot of Renminbi.
       
      3. If you believe in Renminbi at all, there are many opportunities. RMB bonds are already available issued by at least 2 local banks – DBS and UOB. I myself have a structured deposit for RMB (CNH, these need a lot of investigation because they can be dangerous. Bank of East Asia also offer plain old RMB time deposits. BOC I don’t know because I have not checked. If you are really really keen, read this press release by MAS ‘New Initiatives to Strengthen China-Singapore Financial Cooperation‘. There is also a story on this article on Lianhe Zaobao 2 days ago carrying an in-depth analysis by a gentleman from OCBC. It is better if you talk to some one qualified.

    2. Soh Tiong Hum says:

      Hi Daniel,
      Check this out ‘China, Singapore to allow direct trading between currencies‘.

      “China and Singapore will introduce direct currency trading between the Chinese yuan and Singapore dollar,” the Monetary Authority of Singapore (MAS) said in a statement, adding that details will be announced separately.”
       
      “The new initiatives will further promote the international use of the renminbi through Singapore,” the MAS said.
       
      Its managing director Ravi Menon added: “Financial ties between the two countries have deepened considerably and Singapore is well placed to promote greater use of the RMB in international trade and investment in the years to come.”
      China’s rise as the world’s second biggest economy has seen the yuan take on a bigger role in international financial markets.
       
      Britain last week said that direct trading between the yuan and the British pound will be allowed.
       
      China also has similar direct trading arrangements for the yuan with the US dollar, the Japanese yen and the Australian dollar.

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