China FX reserves down $87.2 bln in Nov, capital outflows seen

Due to its relation to the Rand at 50 percent weight, the exchange rate between the local currency and US Dollar closely tracks the Pula/Rand exchange and given the 52-week volatile lows on the South African currency, the Pula has been a causality due to its relation with the Rand. Investors are still on hold when considering an exchange into yuan, with skeptics claiming that the economic value of the currency will still suffer a decrease in the coming months. The designation means, for example, that the yuan can be used in the disbursement and repayment of worldwide bailouts, such as the Greek rescue.

ASHX tracks the CSI 300 USD Hedged Index, which is created to provide direct access to China A-shares while diminishing the negative effects of a depreciating Chinese yuan currency against the USA dollar. By virtue of Pula tracking Yuan, we will likely see some downward pressure on Pula which will be some form of Pula weakness, ‘ he says.

She added that it was also “a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems”.

Meanwhile China is still building its gold reserves – many believe it is doing this far faster than it is stating with its official reserve figures.

However, the true test of the yuan’s importance as an global currency is not whether most of China’s transactions with the rest of the world are denominated in yuan, but rather whether a substantial percentage of transactions among third parties (i.e. among other countries) are denominated in yuan. Moreover, China has gradually adjusted its exchange-rate policy from a strict dollar peg to today’s policy of allowing market forces to play a greater role. For the yuan, the gap is about 4.2 times. So this is a situation of market failure and government intervention will be needed to establish these markets. “Considering the stability of the Chinese currency and the scale of the Chinese debt market, I think that one of the first steps in providing New Development Bank with funds may be entering the Chinese market to borrow in Yuan”, he said last Tuesday at the opening of the BRICS media summit in Beijing. It’s a strategy many countries use, but it makes the “rainy day” reserve fund lower. In other words, the reforms must go on. These facilitate the use of the yuan (‘RMB clearing banks’) as well as the concession of investment quotas to participate in the Chinese Program of Foreign Institutional Investments Qualified in Renminbi (RQFII). This will increase the potential benefits to holding yuan.

After the celebrations, however, we have to face the reality that the has a lot to do to catch up with other major currencies. This is because if they were to embark upon such a course, the scale of the devaluation would need to be in the order of 20% to 30%.

The internationalisation of the Chinese Renminbi (RMB) has not only boosted Malaysian investors’ confidence but has eventually help reduce business cost and exposure to currency volatility.