Why did China release data regarding gold reserves?
After six years, the Chinese central bank announced that at the end of June 2015, the country held 1,658 metric tons in gold reserves. With the review of the Special Drawing Rights basket that comes every five years, the probability of including renminbi is evidently on the rise. The publication of foreign reserves and gold reserves data is an act to display transparency of macroeconomic data. This is also to accelerate IMF’s acceptance of the renminbi into the SDR basket. The announced amount was lower than expected, but the critical question remains how China will continue using gold-buying as a tool to diversify foreign exchange holdings.
So what if renminbi joins the SDR basket?
Internationalisation of the RMB would be fast-tracked, increasing international investors’ awareness regarding offshore yuan-denominated bonds and other assets. At present, RMB bonds are still undervalued as an asset class by foreign investors, and investment in yuan-denominated bonds is a way to diversify portfolios to manage risk. Renminbi becoming a reserve currency will mean that there is greater recognition of China in the global macroeconomic scene.
However, there is evidently room for the Chinese stock market to gain sophistication. The recent crash of the Chinese A Shares market on the Shanghai Stock Exchange in July 2015 points to the need for the government stepping in to maintain stability in the markets and highlights underlying infrastructural flaws. Chinese investors have a very different investment philosophy as compared to investors from, for instance, the US. They tend to look to short-term gains; the crash shows the fear of reliving the 2009 crash scenario. The government understands that its efforts regarding the stock market are taken into consideration by international markets.
With RMB joining the other four SDR currencies, namely the USD, Euro, Japanese Yen and Sterling, there will have to be a set of aligned reforms regarding the capital account. This will ease Chinese domestic firms’ financing needs, which is beneficial in a time of reforms in state-owned enterprises that imply restructuring of Chinese corporations.
Despite the Qualified Foreign Institutional Investors Scheme and the Shanghai-Hong Kong Stock Connect becoming cornerstones for foreign investors to tap into the A-share market, doubt clouds the decisions of these investors as the quality and transparency of A-shares are still questionable. After all, these A-shares may not necessarily have the same disclosure standards as H-shares.
Overall, the push for renminbi internalisation is one of the building blocks of China opening up its capital markets. Evidently, there are a number of policy changes that need to be made regarding capital flows management for the system to be activated. But, as Christine Lagarde of the IMF has said, it’s only a question of when renminbi will be included in the SDR basket.