Central banks will accelerate rise of the renminbi, OMFIF report reveals

Covid-19 and low interest rate environment prompt fundamental shift in allocation plans of many GPIs

The renminbi is on course to become a much more influential part of the global financial system as central banks add the Chinese currency to their reserve assets. Some 30% of central banks plan to increase their renminbi holdings over the next 12-24 months, compared to just 10% last year, while 70% will increase their involvement over the longer term.

Central banks in all regions will be net buyers over the medium term, especially in Africa, where almost half plan to increase their renminbi reserves. Asian assets more generally are in high demand, with 40% of global public investors expecting to increase their exposure to the region. Meanwhile, 18% of central banks plan to reduce their euro holdings over the next 12-24 months, and 20% expect to reduce their dollar holdings over the same time period as the low-yield environment continues to bite.

The results were revealed as part of OMFIF’s annual Global Public Investors report. OMFIF surveyed more than 100 GPIs – central bank reserve managers, sovereign funds and public pension funds – on their asset allocation strategies, investment approaches and market trends. This was a 30% rise in respondents compared to last year.

The report also showed the dramatic impact Covid-19 and the lower-for-longer rate outlook is having on a group of investors that have, across the industry, $42.7tn of assets under management. Trends in diversification – to boost or maintain returns, or to incorporate a more sustainable investment approach – are accelerating, the survey revealed.

For example, 26% of central banks plan to expand their corporate bond holdings and 21% will increase their allocations towards equities. In their search for yield, close to 30% of GPIs overall will reduce their exposure to developed market sovereign bonds, while more than 20% plan to buy more emerging market government debt.

GPIs are helping to increase demand for sustainable assets and are becoming more active investors. Some 92% of central banks invest in green bonds and 21% already invest in sustainable equities. Around 65% of central banks plan to add to their green bond holdings (up from 45% last year). One in 10 central banks say sustainability is now their joint-most important institutional priority, although 50% still do not explicitly implement environmental, social and governance considerations in their portfolios.

A strengthened push to green and grow GPI assets comes as they reach their highest level ever. At the end of 2020, they stood at $42.7tn among the 850 institutions covered by the report. Central bank reserves have also risen to record highs, standing at $15.3tn as of the end of 2020, compared to $14tn at the conclusion of 2019, in spite of the pandemic. Public pension fund assets continue to rise, reaching $18.1tn from $17.2tn as of the beginning of 2021, with the majority of assets concentrated in North America ($9.1tn) and Asia Pacific ($4.8tn). This is partly on account of stellar returns on riskier assets, such as equities, which experienced a stunning post-pandemic resurgence. The same holds true for sovereign fund assets, albeit at a slower pace. Their assets grew by just under 4% to $9.3tn from $9tn.

GPIs revealed increasing concerns about the stability of financial markets and the risks of their diversification drive. Just over 40% of public pension funds believe that their peers are taking on excessive risk. This is in part due to the role of monetary policy: 75% of central banks and more than 80% of pension funds believe monetary policy is having an excessive influence on financial markets and pricing.

About the GPI

Global public investors – central banks, sovereign funds and public pensions funds – are widening their radius ever further. The policies of 850 institutions with worldwide investible assets of $42.7tn have a profound effect on global markets. They are crucially important for growth prospects, the investment climate and capital markets. They will have a significant role in the post-pandemic global recovery. The eighth edition of the report surveys GPIs’ performance and practices across a wide range of investments as well as their activities in the digital economy and sustainable finance.

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