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RMB Inclusion in the SDR, an Important and
Perception Changing Event
December 17, 2015
Deer Isle Financial, LLC
We feel that the IMF including the RMB into the SDR is an important event in terms of changing
perception and risk premium associated with China – perhaps taking it out of an Emerging Market
classification. Our research and analysis reveals a relatively high correlation of SDR change and
Currency change especially as compared to the much lower/lack of correlation to GDP/Rates change.
Historical Correlation between SDR Change and Currency Movement, GDP Growth and 3 Month
Interest Rate Change:i
Currency Change
SDR Currency
Weighting Change
GDP
Growth
3 Month Interest
Rate Change
0.65
0.08
0.08
Never before has the IMF increased a currency’s allocation by as much as the increase for the RMB
(10.92% in Oct 2016 vs. past increases of up to 4%) so there is good reason to believe that a similar
correlation will hold for China.
In addition to the large SDR percentage, China’s relative value to its SDR Peers suggests that Central
Banks/Investors will have an incentive to invest. China offers significantly higher rates for an
equivalent or better credit profile.
Country
2 Year
Interest Rateii
Debt to GDP
Ratioiii
Ratingiv
China
United States
Japan
United Kingdom
2.77%
0.91%
-0.00%
0.61%
282%
269%
517%
435%
AA-/Aa3
AA+/Aaa
A+/A
AAA/AA+
Euro:
Germany
Italy
-0.41%
0.02%
258%
335%
AAA/Aaa
BBB-/Baa2
Interestingly, the RMB comes into the basket at a greater weighting (10.92%), than Yen (8.33%) and
the British Pound (8.09%). The rest of the basket is the USD (41.73%) and the Euro (30.93%). The
DEER ISLE FINANCIAL, LLC
The Fisk Building • 250 West 57th Street, Suite 620
New York, New York 10107
Tel: (212) 488-0555 • Email: [email protected]
Page 2 of 2
RMB weighting is less than the IMF initially indicated at 14 to 16%. The weightings will take effect on
Oct 1, 2016.
The IMF clearly feels that China’s role in the global economy as well as its capital systems warrant it
being considered one of the world’s top five most important currencies. Given that the IMF feels that
China’s peers are the US/EURO/JAP/UK – a risk adjusted return analysis shows that Chinese fixed
income offers a much better risk adjusted return than the other options.
To support this point - we are seeing increased interest in Chinese fixed income after the SDR
announcement. Perhaps China will be taken out of investor emerging market basket and moved into
a basket of SDR peers?
Feel free to contact Deer Isle or log into our data room for our research and analysis, “Positive RMB
Outlook after SDR Inclusion.”
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i
Correlations based on Deer Isle analysis of the currency rate and currency rate changes from Board of Governors of the Federal
Reserve System, retrieved by Federal Reserve Bank of St. Louis. 0.65 correlation is the result after eliminating the outliers, including
Deutsche Mark -15.35% depreciation in 1991, French Franc -15.26% move in 1991, British Pound move -16.91% in 1991 (European
currency crisis), Euro -10.47% in 2001 (Early 2000 recession in Europe) and Japanese Yen 25.85% appreciation in 1986 (Asset price
bubble). If outliers are included, correlation is 0.4. GDP growth rate and interest rate rates from Eurostat,
http://ec.europa.eu/eurostat/data/database.
ii
Source: Bloomberg as of December 01, 2015.
iii
All countries data from McKinsey Global Institute report, “Debt and (not much) deleveraging”, released on Feb 2015 except for Savings
to GDP data; Chinadata as of 2Q 2014; other countries data as of 4Q 2013.
iv
Source: Credit ratings from S&P and Moody’s.
DEER ISLE FINANCIAL, LLC
The Fisk Building • 250 West 57th Street, Suite 620
New York, New York 10107
Tel: (212) 488-0555 • Email: [email protected]