Photographer: Tomohiro Ohsumi/Bloomberg

Yuan IMF Reserves Entry Seen as More Symbolic Than Game-Changing

  • Aberdeen, Investec say it won't affect investment decisions
  • IMF executive board to vote on SDR addition on Nov. 30

For Aberdeen Asset Management Plc and Investec Asset Management Ltd., the yuan’s likely ascension to reserve-currency status next week is more symbolic than game-changing.

The fund managers, which oversee a combined $600 billion, aren’t expecting a rush of investment in China after the International Monetary Fund’s executive board votes on whether to add the currency to its Special Drawing Rights basket on Nov. 30.

"The inclusion itself would not lead us to accelerate our investment,” said Wilfred Wee, a Singapore-based fund manager at Investec, which oversees $112 billion. “What would drive us to invest still comes back to the fundamentals -- what we think would drive both yields and the currency."

Reserve status for the yuan looks all but certain as the IMF’s major shareholders including the U.S. have said they’ll support it. Standard Chartered Plc has predicted it will lure as much as 7 trillion yuan ($1.1 trillion) of funds to China over five years and Moody’s Investors Service said it will be credit positive. But for Investec and Aberdeen, China’s slowing economy and the trajectory of the yuan will remain the key drivers of investment decisions.

"I don’t think the inclusion of the yuan in the SDR necessarily is, in terms of investment, a significant event," said Kenneth Akintewe, a Singapore-based senior investment manager at Aberdeen, which oversees $483 billion. "We think there are a lot of things to focus on whether you have China in your portfolio or not."

Reform Benefits

The yuan will take up a "fairly low" share of the SDR when included and hence the capital flows into Chinese assets won’t be large, Akintewe said. A former adviser to the Chinese central bank said this month the significance of the yuan’s inclusion in the reserve-currency basket may have been exaggerated.

The Chinese currency won’t threaten the U.S. dollar in the short term if it’s included in the SDR basket and the Americans will make an "all-out effort" to suppress the yuan by keeping the greenback strong, Wang Yong, a professor at the People’s Bank of China’s Zhengzhou training school, wrote in the Shanghai Securities News. Wang estimated a 90 percent chance the yuan will win reserve-currency status.

"Our strategies have already priced in the potential SDR inclusion, and hence there will not be any immediate impact on our investments in Chinese assets," said Manu George, a Singapore-based Asian fixed-income investment director at Schroder Investment Management, which oversees $487 billion of assets globally. "The inclusion is positive in the long term for the reforms being enacted by China, and to that end we could envisage seeing our exposure to Chinese bonds increase substantially over the coming years."

Illiquid Markets

While China’s bond market is the world’s third largest, annual trading as a ratio of total outstanding debt is 1.1, compared with 4.7 in the U.S., according to Bloomberg calculations. Fund managers may favor currencies such as the Swiss Franc and the Australian dollar until China can lift capital controls and improve its opaque and relatively illiquid markets.

The yuan has dropped 2.9 percent against the dollar this year, heading for its biggest annual decline since the government unified the official and market exchange rates in 1994, and economists surveyed by Bloomberg see it weakening a further 3.2 percent by the end of 2016. China’s economy is growing at the slowest pace in more than two decades even after six interest-rate cuts in the past year, which helped push the 10-year sovereign bond yield to the lowest level since 2009 last month.

Investec favors Chinese sovereigns bonds and debt sold by policy banks as China’s economic slowdown has put them in a “sweet spot," said Wee.

"Despite all the negative headlines over growth, yields will remain anchored and, if anything, become lower,” he said. “We know that the central bank still has some levers to pull."

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