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China expert: how yuan’s SDR inclusion will affect bond markets

China expert: how yuan’s SDR inclusion will affect bond markets

The likelihood that the Chinese yuan is included in the special drawing rights (SDR) basket by the International Monetary Fund in November will increase demand for yuan-denominated bond fund products.

That’s the view of Andy Seaman, who runs the Stratton Street Ucits Renminbi Bond fund, and is also a partner at London-based Stratton Street Capital.

Seaman told Citywire Asia the possible yuan inclusion in the SDR basket will be a major step towards the currency’s internationalisation. The move will also require investors to adjust the weightings of yuan-denominated assets.

‘If the Chinese yuan is included, every central bank around the world will have renminbi exposure overnight and managers will significantly increase their yuan exposure in their portfolios,’ said Seaman.

Seaman pointed out that most of the central banks or long-term investors do not want to speculate on the Chinese equity market due to its volatility, therefore they would actually prefer to increase their exposure to the bond market.

‘Managers or investors realise that they need to get more and more exposure to the Chinese yuan; however, there are only a handful of global standardised bond funds with renminbi exposure,’ said Seaman.

With only a limited number of dim sum bond funds available around the world, he said, demand for yuan-denominated products will increase.

To include or not include?

The People’s Bank of China has implemented a series of stimulus measures - including the devaluation of the yuan - to strengthen the economy and increase export volumes.

‘The whole purpose of this currency devaluation is to improve the possibility of the renminbi’s inclusion into the IMF’s SDR basket,’ said Seaman. ‘If the move is successful, then that would be quite a major step.’

He also added that while the decision will be taken in November, the IMF will set the implementation date of the inclusion as September 2016.

Appreciation to continue

Seaman said he believes the yuan should continue its recent modest appreciation trend after the Chinese central bank's initial devaluation on August 11. 

‘The yuan’s stabilisation against the dollar means positive gains for investors,’ said Seaman.

‘When you hedge from dollar into the yuan, you get a yield pick-up between 2% and 3%. Therefore, yuan is actually quite an attractive currency compared to the dollar, as dollar is basically yielding zero.’

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