Reforms set to strengthen Chinese currency

Reforms set to strengthen Chinese currency

The internationalisation of the renminbi will see the Chinese currency continue to appreciate steadily, says AB.

At a conference held in Beijing in March, the governor of the People’s Bank of China (PBC) announced that the central bank was aiming for full convertibility of the RMB during 2015.

According to a report entitled The Case for a Robust RMB Strengthens, AB said reform will allow some regional authorities to convert bank loans into municipal bonds, allowing banks to free up balance sheets and reduce systemic risk.

AB director of Asia-Pacific fixed income, Hayden Briscoe, said the reforms are essential to strengthening the RMB.

“The progress China makes with these and other reforms is critical to the success of the overriding policy objective of rebalancing the economy from an investment-driven growth model to one in which consumption plays a greater role than it has in the past,” Mr Briscoe said.

“It requires a balancing act: slowing growth to reduce leverage, while keeping employment high enough to avoid social instability,” he said.

Mr Briscoe argued that the RMB will remain stable in the short term and continue to appreciate in the medium to long term.

“Policymakers are targeting two near-term milestones: inclusion of the RMB in the International Monetary Fund’s Special Drawing Rights basket, and inclusion of China in global bond and equity market indices — for both of which a strengthening, or at least stable, currency would be a prerequisite,” he said.

The risk that policymakers will devalue the currency is unlikely since there is scope to cut interest rates further, Mr Briscoe added.

“The scope for further rate cuts lies in the fact that the PBC’s one- and seven-day repurchase rates (the rates at which the central bank lends to commercial banks) have been rising,” Mr Briscoe said.

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