Trade war may delay renminbi as reserve currency, says reserves manager

Central banks are cautious when building renminbi reserves due to legal and liquidity issues

The adoption of renminbi as a reserve currency has been slow despite China’s internationalisation efforts – and the US-China trade standoff could further delay the process, said a reserve manager at an Asian central bank.

“Issues with capital immobility, exchange rate flexibility, lack of familiarity with local laws, property right and regulations, among others, have all played a part in keeping renminbi from becoming a truly global currency,” said the reserve manager, who was participating at the Central Banking’s National Asset-Liability Asia conference in Singapore today (September 4).

Renminbi accounted for about 2% in global official foreign exchange reserves in the first quarter of 2019, while the US dollar accounted for 62%, the euro 20% and the yen 5%, according to recent International Monetary Fund data. The share of renminbi in total foreign reserves has grown from 1.3% in 2016 to 2% this year, significantly lagging behind China’s presence in global trade and economy, the reserve manager said.

The yuan has not found general acceptance as an international payment currency, either. The share of renminbi as a global payment settlement currency stood at 2% in June 2019, while the US dollar represented 40%, the euro 34% and sterling 7%. Renminbi’s share was roughly the same compared with last year, according to Swift’s RMB Tracker.

Meanwhile, the Chinese currency’s share in the global trade finance market has dropped slightly, amounting to 1.66% in June 2019, compared with 1.88% two years ago, according to Swift data.

“The US dollar remained the currency of choice for trade, investment and hence, building foreign exchange reserves,” the reserve manager said. 

Central banks cautious on renminbi

Central banks are cautious when allocating foreign reserves to renminbi-denominated assets and investing in Chinese markets, as they worry about China’s legal system and liquidity in some assets, the reserve manager said.

“The legal system is working fine up to this point, but has not been put under test, and there are no efforts to change that perception of the legal system,” he said.

The Asian central bank started to accumulate renminbi assets and invest in Chinese markets some years ago, but renminbi’s share in its foreign reserves has stayed low while growth has been moderate, the reserve manager said.

Nonetheless, the reserve manager adds: “China has made progress in making renminbi a trade and investment currency, albeit the pace of adoption has been slow.”

The Asian central bank mainly invests in China’s government bonds and policy bonds, and prefers debt securities with tenors shorter than one year.

Liquidity is a major concern when it comes to China’s longer-tenor bonds, which do not offer a competitive premium given the risks associated, making them less attractive to central banks, the reserve manager said.

It may still be a long time before the Chinese currency gains a share in foreign exchange reserves that matches China’s economic clout in the world, added an economist with a global asset management firm.

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