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Yuan's status will help key business sectors

By Wu Yiyao (China Daily) Updated: 2015-12-07 10:02

Yuan's status will help key business sectors

The decision to include the yuan in the Special Drawing Rights basket is likely to increase capital flows in and out of China. This will boost demand in the bond market. [Photo/IC]

Stock and bond markets, along with the property sector, should benefit from last week's decision by the International Monetary Fund to include the yuan in its Special Drawing Rights basket.

But it might take time for the SDR effect to filter through, according to economists.

"It is unlikely to be immediate, not because there are concerns over depreciation of the currency, but because time and resources are needed to improve conditions in liquidity and regulation to assist greater use of the yuan," Zhang Zhiwei, an economist at Deutsch Bank, said.

In the long run, the yuan's SDR inclusion will boost investor confidence in China.

Still, Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings, pointed out that the move is not a quick economic fix or an alternative to broader structural reforms.

"However, Fitch believes it strengthens the hand of reformist elements within the authorities to resist any pressure for backsliding on China's policy of opening up and liberalizing its markets," he said.

Economists also believe the yuan will be kept strong and stable to support domestic bond and equity markets.

China Government Bonds (CGBs) are likely to become more attractive, according to Mo Ji, chief economist of Asia, excluding Japan, with asset management firm Amundi Hong Kong Ltd.

"An increase in foreign participation in the onshore bond market might help Hong Kong's dim sum bond market as well," Ji said in a note.

"Opening up the domestic bond market, could in a way help mitigate foreign exchange outflows or domestic capital flight should the yuan weaken.

"The SDR inclusion may also indirectly push the A-share market into MSCI (Emerging Markets Index). This in turn will bring more liquidity into the Chinese equity market," Jin added.

Andy Seaman, chief investment officer with Stratton Street Capital in London, pointed out that the yuan will play an increasing role in global, Asian and emerging stock and bond markets.

"Corporate entities and countries with significant business with China will increasingly follow the example of the SDR and retain reserves in (yuan) as trade settled in (yuan) continues to increase," he said.

"The Chinese authorities are likely to respond by further increasing international investors' ability to access the domestic bond market."

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