Central banks around the world are holding record levels of Chinese yuan reserves, according to data from the International Monetary Fund (IMF).
Analysts said the current five-year summit marks another step forward for the internationalization of the Chinese currency, a process that began a few years ago.
In the first quarter of this year, various central banks held Chinese yuan worth 287.46 billion dollars in official foreign exchange reserves, the highest level since the fourth quarter of 2016 and accounting for 2.45% of the total, reported the IMF. last week.
Typically, central banks hold foreign exchange reserves in major currencies such as the US dollar, British pound, euro, and Japanese yen.
It was in 2016 that the IMF first included the yuan in its basket of Special Drawing Rights (SDRs). The volume of the yuan in the currency composition of the IMF’s official foreign exchange reserves (Cofer) has increased for nine consecutive quarters, the IMF said.
Analysts said this reflected the improvement in the yuan’s status as an international currency, which plays a larger role in the global economy.
A substantial increase in the volume of yuan-denominated debt in the IMF’s Cofer database showed widespread adoption of the Chinese yuan as the world’s reserve currency, according to a research note from Fitch Ratings.
The US dollar held the largest 59.54 percent share of global foreign exchange reserves in the first quarter, followed by the euro (20.57 percent) and Japanese yen (5.89 percent), data shows from the IMF.
“If the Chinese economy can sustain medium to high growth and the liquidity and resilience of the financial market can be enhanced, without a systemic financial crisis, then the [yuan] could become the third international currency by 2035, ”said Zhang Ming, deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences.
Zhang predicted that the yuan, used for payments, trade and reserves, will overtake the British pound and the Japanese yen in another decade, ranking third after the US dollar and the euro.
The main factor that can influence the currency composition of central bank reserve portfolios is fluctuating exchange rates, said Serkan Arslanalp, deputy division chief in the Balance of Payments Division of the IMF’s Statistics Department.
Other factors include changes in the relative values of different government securities.
The yuan appreciated more than 1.2 percent against the US dollar in the first half of this year, against a backdrop of weakness in the US dollar against major currencies.
The appreciation of the Chinese yuan against the US dollar is in part due to increased inflows from foreign wallets, Fitch said.
Economists have predicted that over the next few months, China’s goods exports could weaken, as the reopening of developed market economies will likely shift their consumption towards services.
This could lead to a narrowing of the current account surplus and a slower appreciation, or even depreciation, of the yuan.
“Beijing should implement measures, if necessary, to limit [yuan] appreciation, ”said Lu Ting, chief China economist for Nomura Securities.
The share of the US dollar in global reserves in the first three months rebounded slightly to 59.54% from 58.94% – its lowest level in 25 years – in the fourth quarter of 2020, according to IMF data. But it still remains the dominant international reserve currency.
Large fluctuations in the interim, as well as active buy and sell decisions by central banks to support their own currencies, may have led to a short-term shift in the share of the US dollar in global reserves in the past. , said the IMF’s Arslanalp.
However, looking at the longer-term past, the decline in the share of the US dollar in global reserves is undeniable and indicates that central banks have indeed gradually moved away from the greenback, Arslanalp added.
Some analysts have said that as central banks in emerging markets and developing economies seek to further diversify the currency composition of their reserves, the share of the US dollar will continue to decline.
DAILY CHINA / ASIA INFORMATION NETWORK