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Central banks look to China’s renminbi to diversify foreign currency reserves

Central banks look to China’s renminbi to diversify foreign currency reserves %Post Title

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Central banks are looking towards the renminbi to diversify their foreign currency holdings in a sign that geopolitical flare-ups could chip away at the dollar’s dominance.

The proportion of central bank reserve managers that have invested in, or are interested in investing in, the renminbi increased from 81 per cent last year to 85 per cent this year, according to an annual survey by UBS of 30 leading central banks conducted between April and June 2022.

“We’re seeing a gradual erosion of the dollar,” said Massimiliano Castelli, head of strategy for global sovereign markets at UBS. “The picture that emerges is one of a multipolar currency system.”

The rising interest in China’s currency comes after western powers froze about $300bn of Russia’s foreign currency reserves in response to Moscow’s invasion of Ukraine in early 2022. While the move is seen by the majority of managers surveyed as a one-off event, it pits those western powers against Russia and complicates relations with countries not joining in sanctions, which include China.

That accelerates a split between China and the US that had already begun during the Trump administration’s trade war. Four-fifths of the central bankers surveyed said they believed that a move towards a multipolar world — away from a US-centric system — would benefit the renminbi. Less than half said it would benefit the US dollar.

Concerns about high US inflation and the Federal Reserve’s efforts to fight it have also weighed on shorter-term sentiment towards the dollar. Central banks typically hold dollars through US government debt, which has sold off sharply this year as the Fed has tightened monetary policy.

Reserve managers are seeking alternative assets such as equities, green debt and inflation-protected bonds in light of worries over holding US Treasuries, the survey showed. Nearly half of respondents said their portfolios are more diversified now compared with last year.

While the dollar remains by far the world’s top reserve currency, its lead has declined in recent years. It accounted for just under 60 per cent of allocated reserves at the end of the first quarter of 2022, down from 65 per cent in the same period in 2016, according to IMF data. China’s renminbi, however, still only accounts for a small sliver, at less than 3 per cent.

The majority of central bank reserve managers have so far this year added to their dollar holdings. Of the managers surveyed, 62 per cent added to their dollar reserves in the past year, while 54 per cent added to their renminbi holdings.

“Eventually down the road we will see central banks and reserve managers thinking about what else they can have in their ammunition toolkit in order to fight volatility and macroeconomic events,” said Castelli.   (Financial Times)

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