Renminbi surge flags long-term power shift

RenminbiDespite dips in February and May, China’s renminbi currency has been generally stable over the past ten tumultuous months. Until now, that is. Thanks to a combination of an accelerating economic recovery that has triggered a boom in demand for Chinese assets; traders’ return to work after the annual National Day holiday; and the growing possibility of a Joe Biden victory in next month’s US presidential elections, the renminbi staged its biggest rally in 15 years yesterday, at one point rising by 1.45% against the dollar.
This, one US Investment bank believes at least, could be the shape of things to come for the next ten years and possibly longer. Published last month, the Morgan Stanley report predicts that President Xi’s strategy of opening up the country’s economy should see the renminbi gaining considerable influence over the next decade as foreign companies enjoy wider market excess. The report  goes on to argue that this leaves the renminbi poised to become the world’s third largest reserve currency (along with the dollar and the euro), accounting for 5-10% of global foreign reserve assets by 2030 compared to the  IMF’s current estimate of 2%.
“We expect private and reserve managers will generate more than US$150bn in total portfolio inflows to China in 2020 for the third consecutive year, highlighting the transformations underway,” the report says. “The annual inflow should reach $200-300bn in 2021-30.”
It is only four years since the IMF first included the renminbi in its basket of currency reserves and its promotion to FOREX’s high table also owes much to growing cross-border capital market integration and the proliferation of equity and bond connect programs between the Chinese mainland and Hong Kong as well as between Shanghai and major European financial hubs.The People’s Bank of China decision not  to weaken the renminbi in the face of significant onshore and international rallies has also paid its part.