Last week, the Forum of Official Monetary and Financial Institutions (OMFIF) released its eighth annual Global Public Investors (GPI) report. It included a survey of asset allocation plans by reserve managers of central banks, sovereign wealth funds and public pension funds. Together, the 102 investors who responded to the survey manage $ 42.7 trillion in assets (Figure 1).
Figure 1 – Total assets of the IPM by type of institution, in billions of dollars
Source: OMFIF Analysis (GPI 2021).
The survey revealed significant changes in the composition of portfolios predicted by global public investors. Around 18% of those polled said they intended to reduce their holdings of euros over the next 12-24 months, while 20% said so against the dollar.
Twenty years ago, the dollar represented 71% of reserve assets, whereas today it corresponds to 59%. The euro’s presence has grown from 18% to 21% over the same period. These changes have occurred smoothly, gradually and in an orderly fashion over the past 20 years, noted Jean-Claude Trichet, former president of the European Central Bank, when launching the report.
A notable change shown by the survey is appearing in the Chinese renminbi set to become a larger part of the global financial system as central banks add Chinese currency to their reserve holdings. About 30% of central banks plan to increase their allocations to the renminbi over the next 12-24 months, down from just 10% in last year’s report, while 70% said they intended to do it long term.
Central banks in all regions will be net buyers of Chinese medium-term bonds, especially in Africa, where nearly half plan to increase their renminbi reserves. Asian assets in general are in high demand, with 40% of global public investors hoping to increase their exposure to the region (Figure 2).
Figure 2 – Total GPI Assets by Region, USD Billions, 2016-20
Source: OMFIF Analysis (GPI 2021).
However, the starting point for the renminbi’s participation in the composition of reserve assets is still low, at just 2.5%, showing how far its inflection point as an international reserve currency remains somewhat distant.
In fact, in 2015, when the renminbi was incorporated into the basket of currencies that serves as the basis for Special Drawing Rights (SDRs) – the accounting currency issued by the International Monetary Fund (IMF) to be used between central banks – then that it fulfilled the requirement to be among the world’s five largest exporters, it did not fully meet the requirement to be a “freely usable” currency, for which it should be widely used for payments in transactions international and widely traded in major foreign currencies. foreign exchange markets.
The expansion of trade transactions and the increase in official renminbi-denominated reserves, the expansion of which was captured in the OMFIF report, have not yet been accompanied by an equivalent increase in informal transactions and reserves with Chinese bonds. Also last week, this emerged in a report by the Institute of International Finance (IIF) on the presence of the renminbi in international reserves, observed from purchases of Chinese bonds by non-residents, official or private. .
According to the IIR, although the flow of Chinese government bond purchases has increased since last year, central banks accounted for a third of the total flow in 2020 and more than half in the first quarter of this year.
Total bonds are still low by the standards of emerging and developed economies. Despite recent increases, China’s external bond liabilities remain low relative to China’s GDP and its share in world trade (figure 3).
Figure 3 – Despite the recent increase in flows, foreign bond ownership is low in China.
Note: USD = US dollar; GBP = pound sterling; EUR = euro; AUD = Australian dollar; JPY = Japanese yen; CHF = Swiss franc; CNY = Chinese renminbi.
Source: Lanau, S.; Mom, G .; and Feng, P. (2021). Economic Views – Reserve Holdings in Renminbi, Institute of International Finance, July 20.
Less than 3% of international payments are made in Renminbi. Global renminbi reserves are modest as a percentage of China’s GDP and relative to its international trade, especially against well-established reserve currency issuers.
As Trichet said at the launch of the OMFIF report:
“The problem remains that the renminbi is not yet fully convertible. When the renminbi becomes fully convertible, I expect a big leap forward. This is the view of Chinese friends, including former central bank governor Zhou Xiaochuan, who called for complete liberalization of the renminbi. That time will come. And when he comes you will see the full realization [of what the OMFIF survey suggests]. “
Considering the size of China and the limited role of foreigners in local markets, it is safe to say that foreign acquisition of renminbi bonds and foreign exchange reserves may increase. However, it’s best to avoid working with large, fast-moving scenarios. Relations between the United States and China could remain strained and complex, which could dampen the appetite for renminbi bonds of risk-averse reserve managers.
That said, the contribution of reserve accumulation to Chinese bond flows could be significant, even under cautious scenarios. If global renminbi reserves increased from 1.8% to 3% of Chinese GDP over the next decade, annual flows to the local bond market would consistently exceed $ 400 billion. If private investor purchases remain stable, total foreign holdings of government bonds could reach 5% of GDP, close to the emerging market median of 5.6% of GDP.
The point is that, while the trade transactions and reserves of central banks and other global public investors could strengthen the renminbi’s position as an alternative currency to the dollar, euro, yen and pound sterling, the qualitative leap towards the internationalization of the Chinese currency as a full-fledged reserve currency, this will only happen when confidence in its convertibility is sufficient to convince unofficial (private) investors to hold significantly more reserves denominated in it.
Washington, DC-based Otaviano Canuto is a senior fellow at Policy Center for the New South, a non-resident principal investigator at Brooking Institution, lecturer in international affairs at the Elliott School of International Affairs – George Washington University, and director of Center for Macroeconomics and Development. He is a former vice-president and former executive director of the World Bank, former executive director of the International Monetary Fund and former vice-president of the Inter-American Development Bank. He is also a former Deputy Minister of International Affairs at the Brazilian Ministry of Finance and a former Professor of Economics at the University of São Paulo and the University of Campinas, Brazil.