The Monetary Authority of Singapore (MAS) has become the first central bank to designate renminbi-denominated assets as part of its $247 billion of foreign reserves, after recent moves by China to open up its interbank bond market (CIBM).
This is a further step towards the yuan being recognised as a global reserve currency, and other foreign reserve managers are expected to follow suit and boost their investment in renminbi assets. This is set to take place against a backdrop of low yields globally and before the IMF starts to include renminbi into its SDR basket this coming October.
MAS has invested in renminbi assets and the CIBM through its $100 million quota under the qualified foreign institutional investor (QFII) scheme. But it could not previously include such assets in its official foreign reserves because of restrictions on capital repatriation from China.
The MAS move follows the IMF’s decision in December to include renminbi as the fifth currency in its special drawing rights (SDR) basket, starting from October 1. The yuan will become the first emerging-market currency to be included, with a weighting of 10.92%.
The IMF’s decision has assigned the renminbi a status of “freely usable currency” and allowed it to be reported as part of a central bank’s official foreign reserves. Before the IMF move, foreign central banks needed to report renminbi assets as part of their foreign assets rather than official foreign reserves.
Renminbi assets accounted for 1.1% of central banks’ foreign assets as of the end of 2014, according to the IMF.
Becky Liu, senior rate strategist at Standard Chartered in Hong Kong, expects many other central banks to follow the MAS in reclassifying their renminbi assets. "We expect a material increase of reserves investments in renminbi-denominated assets under the current ultra-low-yield environment,” she said.
China’s State Administration of Foreign Exchange (Safe) removed quota requirements and repatriation restrictions for the $6.7 trillion CIBM market last July. It also opened the CIBM to three types of foreign official asset owners: central banks, sovereign wealth funds and supranational/quasi-government institutions.
Safe then opened the CIBM to foreign asset managers and other institutions, such as insurers and pension funds, in February. Most recently the FX regulator clarified the rules on capital remittances in late May.
Despite the greater flexibility provided by the latter clarification, some asset managers say they are still waiting for clarity on capital gains tax and the ability to hedge.
UK-based Insight Investment this month became the first foreign asset manager to register for the CIBM programme.