A further stamp of approval for the internationalisation of the Chinese currency
Germany’s central bank, whose reserves stockpile amounts to €167 billion, announced this week that it would include the Chinese yuan in its reserves. According to Joachim Wuermeling, a board member of the German Bundesbank, this decision is “part of a long-term diversification strategy” of the Bundesbank.
The French central bank, The Bank of France, also announced this week that it is already holding some currency reserves in Chinese yuan, although the majority of its currency reserves remain invested in U.S. dollars.
These reflect the increased prominence of the Chinese currency in the global financial landscape.
The enhanced role of the Chinese yuan is also evidenced by the fact that an increased number of central banks are holding assets denominated in the Chinese currency as reserves. The ECB invested €500 million of its reserves in yuan-denominated assets during the first half of 2017. The Swiss National Bank has purchased assets denominated in the Chinese currency. These followed the International Monetary Fund’s inclusion of the Chinese yuan to its special drawing rights basket on 1 October, 2016, alongside the U.S. dollar, the euro, the Japanese yen, and the British pound.
While the level of renminbi reserves compared to that of the U.S. dollar and the euro is still low, it is certainly becoming increasingly popular for central banks to hold renminbi-denominated assets as reserves. This, together with the continued development of China’s Belt and Road initiative involving the construction of infrastructure to enhance cooperation between Eurasian countries, are contributing to the further internationalisation of renminbi.
However, factors which could affect the pace of internationalising the Chinese currency should not be overlooked. They include limitations based on policy (e.g. restrictions imposed by the Chinese government on foreign investments into China) and the fixing of the Chinese currency’s exchange rate.