Yesterday, SOSV teamed up with Clear Treasury in London to take a deep dive into the future of China’s currency, the renminbi (RMB). As the currency’s international prominence has grown, including the recent inclusion in the IMF’s basket of reserve currencies, investors and startups are taking note. Here are a few of the highlights from yesterday’s webinar:
The Growth of the RMB is a Long Time Coming
The recent inclusion by the IMF of the RMB in the SDR basket of reserve currencies is no accident; it’s something China’s been advocating for years. After a rejection 5 years ago, China amped up the lobbying efforts, finally winning admission (and the accompanying prestige) in November. The result is just a small part of what has become a virtuous cycle for China: as the perceived stability and value of the RMB has grown, so too has its place in both Chinese domestic and international trade. By the end of this decade, it’s estimated that up to 35% of China’s trade will be denominated in RMB, and a recent SWIFT report noted that the RMB is the 8th most traded global currency. This, coupled with the rapid growth of the Chinese economy over the past 25 years has led to an increased valuation of the renminbi, a change that is not without consequence. This leads us to…
Government Currency Interference — China’s Sword of Damocles?
Ask those who follow China’s currency closely, and they’ll note that government interference and efforts to control the valuation of the RMB remain a persistent problem for the widespread adoption of the currency. As China’s economy has cooled, currency hawks worry that the government will step up its interference in order to make China’s exports more competitive internationally. Indeed, Peter O’Flanagan from Clear Treasury argues that the value of the RMB is expected to remain suppressed through at least 2016. All’s not lost however, as most market watchers predict that the Chinese government will yield to growing international demand for the RMB, thus allowing market forces to prevail and the gradual increase of valuation to continue.
Originally published at sosv.com on December 9, 2015.