China is the second-largest investor in US government bonds (or US Treasuries), trailing only the US Federal Reserve, but as the renminbi becomes more international, Chinese demand could drop, with significant implications for US yields.

The International Monetary Fund (IMF) is scheduled to decide later this year whether to include the RMB in its Special Drawing Rights (SDR) currency basket. In our view, China’s currency now meets the technical requirements for SDR inclusion, and we see a better than even chance that the IMF will add the renminbi.

Beijing appears to have taken up the challenge of the SDR review this year by accelerating the liberalisation of China’s capital account. However, this liberalisation cannot be achieved with a fixed RMB, so China, as this month’s move by its central bank has demonstrated, is likely to be heading towards a floating currency regime.