Limits to Chinese renminbi’s internationalisation
At the end of September, the International Monetary Fund (IMF) released its Currency Composition of Official Foreign Exchange Reserves (COFER) data for the second quarter of 2019.
The report showed that since Q3 2018, the share of central banks’ known currency allocations had stabilised at around 94% of total reserves. This indicates that countries, especially China, are now more fully reporting their FX allocations to the IMF. Indeed, with the allocation of just 6% of global FX reserves now unknown, the previous China-related distortions have largely been overcome.
The data reveals a trend for central banks to allocate more to Asian-Pacific currencies like the yen and Australian dollar, in particular the Chinese renminbi. Central banks’ currency claims in renminbi increased a significant 17.3% in Q2 19 compared to a year earlier. However growth in claims in renminbi has slowed to around 4% quarter over quarter since Q3 2018. Unless trade tensions abate significantly, there could be limited scope for further large increases and the renminbi still only represents 2% of allocated reserves, far behind the US dollar, which still represents 62% of central banks’ FX reserves and the euro, which represents 20%.
In contrast with the renminbi, central banks’ claims in Swiss franc dropped 9.3% from a year earlier in Q2 19, indicating that sharply negative interest rates are having an impact on reserve managers’ preferences. The allocation to the US dollar rose only 3.5% despite its attractive yield, thus highlighting moves by central banks to diversify away from the greenback.
Based on the size of its economy, the renminbi would seem the likeliest to increase its share of currency reserves at the expense of the US dollar. However, the renminbi’s low international usage today would seem to preclude a large-scale movement in that direction.
Although the internationalisation of the renminbi is a long-term objective for the Chinese authorities, their top priority is financial stability. There may be limited scope for further liberalisation of the capital account as long as the trade dispute with the US continues to rumble in the background. The low international usage of the renminbi, concerns about the long-term outlook for the Chinese economy and controls on China’s capital account are hurdles that could also limit future increases in the renminbi’s share of currency reserves.