The International Monetary Fund last week reported holdings of $85bn of renminbi claims in the currency reserves of world central banks. This statement, covering the last quarter of 2016, was the first official IMF statement since China’s currency was included in the special drawing right.
Of the eight currencies included in the IMF’s ‘composition of official foreign exchange reserves’, the renminbi is the seventh most widely held. The Chinese currency trails the dollar, euro, sterling, yen, the Canadian dollar, and the Australian dollar. US reserve asset supremacy remains, with the dollar accounting for 64% of reported reserves, adding up to $5.1tn.
The renminbi accounts for just over 1% of the $7.9tn disclosed in a total of 146 reporting central banks and other reserves-holding entities. The latest IMF data match the findings of an earlier, less comprehensive survey in August 2015, showing that 38 monetary authorities held renminbi assets in 2014, making up 1.1% of global holdings of ‘official assets’ (a wider definition than ‘reserve assets’), against 27 holders (0.7% of the total) in 2013.
When the IMF included the renminbi in the SDR basket from October 2016, it gave the currency a weight of 11%, or one third the share of the euro and one quarter of the dollar’s. This is a clear indication that the Fund expects the renminbi’s status as a major reserve currency to grow significantly.
Beijing promotes the international use of its currency through swap arrangements and by supporting trade settlement in renminbi. The authorities are improving foreign investors’ access to Chinese capital markets. However, Chinese policy-makers must do more to allay concerns over currency manipulation, financial market transparency, and rising debt levels. One problem is that there are too few renminbi-denominated liquid assets for reserve managers to own.
Asian monetary authorities hold most global foreign reserves. Capital preservation and liquidity appear to be the priority. Analysts suggest that, given China’s size, reserve managers should hold around 20% of their liquidity in renminbi. Such an allocation implies that central banks should own a similar share of China’s $9tn bond market. While Chinese policy-makers have tried to attract foreign reserve managers, they are yet to invest meaningfully in Chinese bonds.
The use of the renminbi in global trade has diminished. In December, it accounted for 1.7% of payments, down from 2.3% a year earlier, according to the Society for Worldwide Interbank Financial Telecommunication. Over the whole of 2016, the value of payments made in renminbi fell by almost one third.
Both Yi Gang, deputy governor of the People’s Bank of China, and Pan Gongsheng, director of the State Administration of Foreign Exchange, have indicated that keeping the renminbi stable is a priority. Internationalisation of the currency remains a long-term aspiration. But in the short term, demand for Chinese assets will not be able to offset the outflow pressure on the capital account.
The $7tn equity market may provide additional depth, but central banks will continue to act cautiously. The MSCI last week opted against wider inclusion of Chinese A shares into its emerging market benchmark. In the long term, full inclusion in the MSCI and FTSE benchmarks could lead to more than $600bn in equity inflows. Though China faces several tests on its path towards market liberalisation, the renminbi’s global status as an international reserve currency can only improve from this humble start.
Adam Cotter is Head of Asia and Chief Representative Singapore at OMFIF.