Interbank Currency Rates in Pakistan - Today's Inter Bank ...

The Renminbi - The People's Currency, and Soon the World's?

• First, a blunt fact: while multiple reserve currencies have co-existed before, and of course dominance today does not guarantee dominance in the future, with the British pound's fall as a gentle reminder of this, the PBOC is pragmatic in stating that dollar's demise looks a long ways off. Part of this is the on-the-ground data indicating that the drive to internationalisation has indeed lost much of its momentum as a reserve currency.
  
• There is no better reminder that the US dollar is dominant than the rout across emerging market economies sine 2016-2020. The worst-performing currencies of 2019 shared a disproportionate reliance on the greenback. In 2015, 62 per cent of countries anchored their currencies to the dollar and about the same percentage of developing countries borrow in the currency.
  
• On the other hand, less than 30 per cent of countries use the euro as an anchor for their exchange rates and only 13 per cent of external debt for developing countries is euro-denominated. The pound and the yen barely show up in the data.
  
• When it comes to global currency reserves held by central banks, the dollar is unrivalled. While its share of global foreign-exchange reserves has fallen for five consecutive quarters, global central banks have more or less held some 60 per cent or more of their reserves in the greenback since 1996. Even with a loss of confidence in US markets, forex holdings in the Renminbi have been somewhat insignificant.
  

• In March 2019, China introduced its first renminbi-denominated oil futures contract, an attempt to have an alternative for domestic and international investors and traders to the petro-dollar order. However until the central government creates bilateral agreement with major oil-producing (OPEC) states to accept payment in Renminbi, this will continue to see sub-optimal results.
  
• Since gaining a spot in the IMF's Special Drawing Rights basket of reserve currencies in 2015, China has also extended local currency swaps with various countries, including those along its landmark Belt and Road initiative, as well as took steps to open up its local bond market to foreign investors. Though given the sputtering results in BRI agreements and the concerns on excessive lending to questionable projects/governments, the BRI as a route to internationalisation has taken a backseat for policy makers.
  
• Of concern to the PBOC and MOF policy analysts is that internationalisation of China's currency has stalled, and by some measures even reversed. As in 2016, the Renminbi was the fifth most actively used currency for domestic and international payments, with a roughly 2 per cent share, according to SWIFT. That's a drop from 2014 and 2015 when the use of China's currency doubled — in a year — to 2.8 per cent.
  
• When only international payments are considered, the Renminbi drops to eighth place behind: the dollar, which comprises nearly 45 per cent; the euro with 32 per cent; followed by the Japanese yen, British pound, Swiss franc, Canadian dollar and Australian dollar, which all have a share of 5 per cent or less.
  
• Allowing market forces to play a larger role in determining the Renminbi's value and opening up the capital account would require a complete overhaul of the country's financial system. While we realise that such a policy shift would bring some expected gains, the PBOC sees little reason to make a great pivot towards liberalisation, but instead a concerted series of smaller policies - or to put it more traditionally, 'Crossing the river by grasping the stones on the riverbed.'
  

• A new rule shall be instituted on cross-border Renminbi FDI which stipulates that, in principle, all the foreign enterprises are allowed to raise Renminbi funds in offshore Renminbi markets and repatriate them back to the mainland in the form of FDI. Previously, the foreign firms’ behaviours of remitting Renminbi back into Mainland were subjected to the PBOC’s approval on a case-by-case basis.
  
• These transactions are to be settled in Hong Kong accounts, thus increasing the amount of Yuan in circulation offshore; these offshore Renminbi will be distinctly referred to as CNH rather than the onshore CNY. Furthermore, this allows the PBOC to act should the policy be abused by market speculators looking for an easy entry into China's domestic capital markets.
  

• The Ministry of Finance and the Ministry of Foreign Affairs shall begin to broker with OPEC states an agreement on settlement of trade in crude oil and its derivatives be conducted in Renminbi, in a further boost to the Shanghai International Energy Exchange and Shanghai crude oil futures market.
  
• The extension of the “mini-QFII” scheme to India, Pakistan, ASEAN, the Republic of Korea and Japan which will allow some foreign central banks, beyond only a handful of smaller nearby Asian countries, to start building a limited amount of currency reserves even before anything like full currency convertibility will be authorised and conducted. QFII stands for Qualified Foreign Institutional Investor, a designation that allows a company to invest in Chinese bonds and equities — though again, within guiding limits issued by the PBOC on a case-by-case basis.
  
• Regulators will begin a similar pilot scheme - RQFII - that would allow financial institutions with a physical mainland presence to remit currency from their Hong Kong subsidiaries back to the mainland — and, potentially, foreign central banks to invest small amounts of Renminbi in the Chinese interbank bond market.
  
• The Hong Kong Monetary Authority already has QFII status, and the Monetary Authority of Singapore has applied, with the PBOC accepting further applications.
  
• Foreign institutions will be given a capped access of no more than $100 million in Hong Kong accounts to derivatives, including financial futures, commodity futures and options in testing the markets' reaction to foreign operators.
  

The rupee, which lost 3.6 per cent on Thursday to close at 146.2 against the U.S. dollar in the interbank market, dropped further on Friday, dealers said, selling at 149.50 in the interbank market and 150 in the open market.
The fall reflects the IMF's condition for a "Market-based exchange rate mechanism, which will see limited intervention by the central bank now," said Saad Hashemy, chief economist and research director at Topline Securities in Karachi.
Pakistan's stock market also declined on Friday, with the benchmark KSE 100 index down 2.4 per cent by 0615 GMT. While the exact conditions of a final IMF deal are still unknown, Sunday's Staff-Level accord, which must still be approved by the Fund's board in Washington, said a "Market-determined" exchange rate would help the financial sector.
Late on Thursday, the central bank issued a statement saying the sharp fall in the rupee "Reflects demand and supply conditions in the foreign exchange market" and would help in correcting market imbalances.
While many analysts see the rupee as overvalued and say the central bank has wasted billions defending it, a weaker currency is likely to fuel inflation, which is already over 8 per cent, with power and fuel prices hit especially hard.
The central bank, which is due to announce its latest interest rate decision on Monday, said late on Thursday that its foreign exchange reserves fell $138 million in the week ending May 10 to $8.846 billion, less than needed to cover three months of imports.