Friendshoring gaining traction in central bank reserves

African and Asian central banks shift to China

Central banks around the world are gradually shifting away from the dollar. OMFIF’s Global Public Investor 2023 report finds important regional divergences in this trend.

Institutions in Sub-Saharan Africa and the Asia Pacific region are more willing to add to their renminbi holdings compared to their European counterparts. They are less deterred by geopolitics when considering investment in China. These results indicate a possible ‘friendshoring’ of reserves over the next decade, meaning central banks with closer economic, or perhaps political, ties with China are more likely to shift away from the dollar and towards the renminbi. This is not to say the dollar will be overthrown as the dominant reserve currency anytime soon. From our survey of 75 central banks, on average, respondents expect that the dollar’s share of global reserves will fall by 5 percentage points over the next decade, remaining above 50%. On the other side, central banks predicted that the renminbi will rise to 6% of global reserves in this time, from just under 3% now. While little, such movements points to the gradual realignment of global economic power that is shifting steadily away from the US.

This incremental movement is in line with central banks’ stated objectives to diversify away from the dollar. Given sanctions regimes, the volatility of the current US political landscape, and murmurs about its waning economic might, many central banks are prudently shifting away from their dollar holdings, towards renminbi and, in particular, the euro. These goals can explain why all regions expect the dollar’s global share of reserves to decline in the next decade.

Yet one element that has remained underexplored is the geographic dimensions that define the rise of renminbi and the decline of the dollar. In the Global Public Investor 2023 survey, OMFIF found that the expectations for global dollar holdings in 10 years are lowest for Asia Pacific central banks, at 51% of total global reserves. This corresponds to a growing planned shift towards renminbi among those institutions. Figure 1 offers a window into exactly these dynamics. It shows planned renminbi increases over the next decade for two-thirds (67%) of central banks in Sub-Saharan Africa and Asia Pacific. These results tally with the growing economic ties between China and these regions. Meanwhile, only a quarter of European central banks plan to increase their renminbi holdings. This suggests that, though most central banks plan to diversify away from the dollar, friendshoring dynamics may play a role in whether renminbi is viewed as a suitable alternative.

Figure 1. Africa and Asia look to shift to renminbi

Central bank reserve managers’ planned currency allocation shifts over the next 10 years, average % of respondents

Source: OMFIF’s Global Public Investor Survey 2023

The movement towards Chinese markets and currencies was a key topic of discussion in OMFIF’s 2023 Global finance forum in Hong Kong. In the first session on the Chinese financial market environment, panellists spoke about the draw of Chinese capital, investments and currency. Mark Burgess, chairman, OMFIF Asia, mentioned that Chinese investment is a key part of ‘diversifying assets’. He also commented that, despite a ‘restructuring process’, during which interest rate spreads have narrowed, Australian investors have a long-term approach that looks to move closer to China. Meanwhile, Kerrigan Procter, chief executive officer, Legal and General Capital, Asia Pacific, commented that ‘science and technology growth’ is a crucial area for investment.

These remarks align with central banks’ stated reasons for moving towards renminbi (Figure 2). We find that the positive outlook for Chinese investments is cited as a factor by 53% and 27% of Sub-Saharan Africa and Asia Pacific central banks respectively. On the other side, this figure is only 4% for European central banks. It’s a similar story when considering the renminbi’s growing importance in the global economy. Close to 70% of those in Sub-Saharan Africa and Asia Pacific find this a compelling factor for renminbi investment, compared to less than 40% in Europe.

The results suggest that the reasons for investment in Chinese markets – like the shift away from the dollar – is marked by distinct regional and geopolitical dynamics. Europe’s investment in Chinese assets is borne chiefly from a desire to diversify. Yet African and Asian central banks are moving into Chinese markets due to a desire to diversify as well as a perception of China’s growing importance in the global economy.

Figure 2. Regional divergences for investing in China

Central bank reserve managers’ reasons for investment in Chinese assets, % of respondents

Source: OMFIF’s Global Public Investor Survey 2023

The geographic divergences between central banks’ reasons for investment in China are matched by similar divergences in the factors that might spur them to avoid Chinese markets. Countries more firmly connected with China, geographically and economically, show fewer scruples about geopolitical risks than those at a greater distance. This factor is cited as a barrier most commonly by European central banks (almost 90%), followed by Latin American banks as well (almost 70%). Those figures were much lower at 57% for Sub-Saharan Africa and only 40% in Asia Pacific. Likewise, caution regarding market transparency is particularly pronounced among European and Latin American central banks, rather than those elsewhere.

Figure 3. African and Asian central banks less concerned by geopolitics

Central bank reserve managers’ barriers to investment in Chinese assets, % of respondents

Source: OMFIF’s Global Public Investor Survey 2023

The distinct schism between Sub-Saharan Africa and Asia Pacific on one hand and Latin America and Europe on the other suggest a possible friendshoring of international reserves. The former group are more likely to diversify towards the renminbi due to optimism on China’s economy and investments and are less concerned by geopolitics and market transparency. This realignment in currency markets will be gradual but adds to the sense that the global economy is fracturing between the US and China.

Julian Jacobs is Senior Economist at OMFIF.

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