u003cpu003eThe inclusion of the renminbi into the Special Drawing Rights, a reserve asset managed by the International Monetary Fund, is a major milestone in Chinau0026rsquo;s mission to globalise its currency. The decision has been a long time coming, and has effectively granted the status of global reserve currency on to the renminbi.u003c/pu003eu003cpu003eAt first glance, it looks like the kind of development that should be of primary interest to central bankers, who will be thinking about how to reallocate their reserves to match more closely the basket of currencies that makes the SDR. With a little reflection however, it should be clear that the move by the IMF is a reminder for companies across the world that the renminbi needs to be part of their business strategy.u003c/pu003eu003cpu003eThe reasoning is as follows. The renminbiu0026rsquo;s newfound status as a reserve asset is going to, over the medium term, boost demand for the currency among central banks. A recent Bloomberg poll of reserve managers gave a median prediction that 10% of global foreign exchange reserves will be held in the Chinese currency by 2025.u003c/pu003eu003cpu003eTo put this into perspective, there is currently $7.8 trillion worth of reserves globally outside of China. So if such a diversification were to take place today, it would require nearly $800 billion to go into renminbi-denominated assets.u003c/pu003eu003cpu003eAs countries hold more of their wealth in the renminbi, it gives a powerful sign to businesses that the currency is a viable store of value. The result will be an uptick in companies using the currency to settle international trade.u003c/pu003eu003cpu003eAt the same time, Chinau0026rsquo;s capital outflows are growing rapidly, as local investors diversify into foreign assets. Outbound investment by businesses and individuals is expected to generate $1.5 trillion worth of outflows by 2020.u003c/pu003eu003cpu003eThe renminbi will therefore be stuck in the middle of a supply and demand tug of war that is set to increase the level of two-way volatility in its exchange rate. It will be a sharp turnaround from the situation just a few years ago, when the Chinese currency was considered by many to a one-way bet on appreciation.u003c/pu003eu003cpu003eAny company that does business with China should take note of this upcoming chain of events, as movements in the renminbi are set to become a consideration that cannot be ignored. Different companies however, will have different areas of focus.u003c/pu003eu003cpu003eA manufacturer, for example, that sources some of its parts from China may well be mostly focused on the exchange rate, which could influence the cost of some of its components. A fo-reign firm that is investing in China while directly trading with local customers, will need a more advanced currency strategy which not only takes into account the value of the renminbi, but also the liquidity conditions to ensure that it can get hold of enough cash to meet its obligations.u003c/pu003eu003cpu003eWith volatility in the renminbi increasing, the costs of eschewing currency considerations could be considerable u0026ndash; even for companies that have a small direct exposure to China. As the worldu0026rsquo;s second largest economy, it has a huge influence on everything from the health of emerging markets to the price of commodities. A significant shift in the outlook for the renminbi could therefore have a substantial impact on financial markets, trade flows, and even international relations.u003c/pu003eu003cpu003eWe got a taste of the renminbiu0026rsquo;s importance during the summer, when the Peopleu0026rsquo;s Bank of China increased the currencyu0026rsquo;s flexibility via a one-off adjustment that led to a sharp, but short-lived, devaluation. Financial markets went into a spin, and the media was quick to announce that China had fired its first shot in a global currency war.u003c/pu003eu003cpu003eThe panic quickly died down, and although the central banku0026rsquo;s move was a shock to some, for those who pay close attention to the renminbi, it was simply the latest step in Chinau0026rsquo;s long-term goal to introduce more market forces into the value of its currency.u003c/pu003eu003cpu003eThereu0026rsquo;s no one-size-fits-all renminbi strategy that is applicable to all companies. Every business needs to find an approach that fits its circumstances. But whatu0026rsquo;s clear is that despite encouraging signs that companies want to do more business with China, many firms are missing out on the chance to get ahead of their rivals by including the renminbi into their business planning. According to HSBCu0026rsquo;s RMB survey this year, only 22% businesses are using the currency to settle trade.u003c/pu003eu003cpu003eThe trend though, is clear u0026ndash; the renminbi is on track to enter the top tier of global currencies, and the IMFu0026rsquo;s SDR decision is only the la-test reminder. The imperative for businesses the world over it is to make the currency a key part of their foreign exchange considerations. Those who fail to do so could find themselves playing catch-up with their competitors.u003c/pu003eu003cpu003eu0026nbsp;u003c/pu003eu003cpu003eAlastair Bryce CEO, HSBCu003c/pu003e
SDR inclusion: a reminder for business
