Chinese Yuan Assumes Reserve Currency Status

By Luke Spajic

In a quiet but significant marker for China, the yuan has become a reserve currency: On 1 October, the International Monetary Fund (IMF) officially included the yuan in the currency basket for its Special Drawing Rights, alongside the U.S. dollar, euro, yen and British pound.

The IMF’s decision to include the yuan last November made headlines and came in the midst of a tumultuous year for the currency and for China’s financial markets. Relative calm has returned in recent months: The yuan has continued to depreciate against major currencies but in a more gradual and orderly way than the sudden devaluations in August 2015 and early 2016. And China’s stock market has largely recovered from its steep plunge early this year.

Indeed, despite the bumpy road over the past year, the promise held out by the IMF’s decision is gradually being realized: China’s presence in global capital markets is increasing. Earlier this year, China announced that it would open the interbank bond market to foreign investors much sooner than expected. Chinese equities appear to be on track for inclusion in MSCI’s widely used emerging market equity index over the next year or two. And now that the currency has achieved reserve status, the yuan is likely to be used more widely in international transactions going forward.

OUTLOOK FOR CHINA
Looking at the year ahead, we expect the current trend to continue: more progress on financial market reform amid slowing growth and continued depreciation in the yuan. Our base case calls for GDP growth of about 6.4% in 2016 and 5.75%–6.25% in 2017, and a gradual decline in the yuan versus the U.S. dollar over the next 12 months.

VIEW ALL

View all

At that point, China will take center stage again with the 19th National Congress of the Communist Party in the autumn of 2017. Held once every five years, the National Congress next year is likely to have a profound impact on power, personnel and policy in China.

For more on PIMCO’s outlook for China and the emerging markets, read A Constructive Case for Emerging Markets.

Luke Spajic is PIMCO’s head of emerging markets portfolio management for Asia.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2016, PIMCO.

PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Asia Pte Ltd (501 Orchard Road #09-03, Wheelock Place, Singapore 238880, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia) offers products and services to both wholesale and retail clients as defined in the Corporations Act 2001 (limited to general financial product advice in the case of retail clients). This communication is provided for general information only without taking into account the objectives, financial situation or needs of any particular investors.

CMR2016-1006-217090