Central banks will accelerate rise of China’s yuan, global survey shows

23-Jul-2021 Intellasia | Reuters | 5:02 AM Print This Post

The Chinese yuan is on course to become a much more influential part of the global financial system with almost a third of central banks planning to add the currency to their reserve assets, a closely followed survey showed on Wednesday.

The Global Public Investor survey, published annually by the London-based OMFIF think tank, showed 30 percent of central banks plan to increase yuan holdings over the next 12-24 months, compared with just 10 percent last year.

It comes despite the differences between Western governments and China on the global stage. The yuan’s rise will almost certainly be a global trend, but may be especially strong in Africa where almost half of central banks are planning to increase their yuan reserves.

Other eye-catching findings showed that 75 percent of central banks now thought monetary policy was having excessive influence on financial markets, although only 40 percent thought these policies needed to be actively reconsidered.

In stark contrast to the yuan, 20 percent of central banks plan to reduce their holdings of the US dollar over the next 12-24 months and 18 percent plan to reduce their euro holdings.

Some 14 percent also want to cut their holdings of euro zone sovereign debt in what could be interpreted as a response to the European Central Bank’s deeply negative interest rates.

The report also showed that only 59 percent of central banks would be willing to use more than 30 percent of their reserves in the event of a serious currency shock, while 45 percent of pension funds now invested in gold, well up from 30 percent in last year’s survey.

It estimated that central banks, sovereign wealth funds and public pension funds control a record $42.7 trillion worth of assets. Central bank reserves alone rose $1.3 trillion last year to new high of $15.3 trillion.

The report also showed the dramatic impact COVID-19 and the lower-for-longer interest rate outlook was having.

Trends in diversification to boost or maintain returns, or to incorporate a more sustainable investment approach are accelerating.

SUSTAINABILITY

In their search for yield, close to 30 percent of global public investors central banks, sovereign wealth funds and public pension funds will reduce their exposure to developed market sovereign bonds, while more than 20 percent plan to buy more emerging market government debt.

Just over a quarter of central banks also plan to expand their corporate bond holdings and 21 percent will increase their allocations towards equities.

It is likely to add to the concerns the central banks themselves have that experimental monetary policy, such as negative interest rates and mass stimulus programmes, are exerting excessive influence on financial markets.

“The way central banks are intervening in the market produces substantial changes to the prices of some assets and can lead to financial bubbles,” one unidentified central bank respondent cited in the report said.

GPIs are also increasing demand for sustainable assets and becoming more active investors. Some 92 percent of central banks invest in green bonds and 21 percent already in sustainable equities. Around 65 percent of central banks plan to add to their green bond holdings, up from 45 percent last year.

One in 10 central banks also said that sustainability was now their joint-most important institutional priority, although 50 percent still did not explicitly carry out environmental, social and governance considerations in their portfolios.

“There has definitely been an acceleration (towards ESG) due to COVID,” OMFIF’s Chief Economist Danae Kyriakopoulou told Reuters.

“At the beginning (of the pandemic), we thought there would be a focus on the short-term, the quick boosts to recoveries. But actually there has been this realisation that our financial systems are so vulnerable to things outside the financial world”

https://www.reuters.com/business/central-banks-will-accelerate-rise-chinas-yuan-omfif-report-2021-07-21/

 

Category: China

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