Guest post: French, Swiss central banks swell rush to hold renminbi
Aug 20, 2014 3:58pm

By Jukka Pihlman, Standard Chartered

Adopted at pace by central banks around the world, China’s renminbi is now seen by many as a de facto reserve currency – and well on the way to becoming an official one.

Central banks have caught the renminbi fever, and are showing strong interest in investing part of their foreign-currency reserves in the Chinese currency, with more than 50 central banks now actively doing so either onshore or offshore.

Uptake is strongest in Asia, Africa and South America – regions with fast-growing trade and investment links with China – but even in Europe central banks are busy allocating reserves to the renminbi.

Earlier this year, Banque de France announced it is active in the renminbi market, and in July the Swiss National Bank received a Rmb15bn investment quota from the People’s Bank of China (PBOC), the Chinese central bank. The actions of these two large and sophisticated players are likely to reverberate in the European central-bank community, sparking others to follow.

The allocation shift by central banks is all the more remarkable, given that the renminbi does not yet qualify for official reserve-currency status. It is a powerful indicator of the great expectations in the renminbi as the currency continues on its path towards internationalisation.

Whilst the renminbi is unlikely to challenge the US dollar’s dominance as a global reserve currency any time soon, the international monetary system is rapidly becoming ‘multi-polar’, with the renminbi gaining in prominence as a reserve and transaction currency.

Currently the world’s seventh most used currency for payments, the renminbi is predicted to be fourth by 2020, after the dollar, the euro and the pound. As such, for many central banks, investment in the renminbi makes increasing sense, as holding renminbi reserves effectively acts as a buffer for covering a country’s import bill from China.

PBOC has helped pave the way for renminbi adoption by foreign central banks, giving them special direct access to invest in the renminbi interbank bond market. The Chinese authorities have also given central banks preferential treatment in its Qualified Foreign Institutional Investor (QFII) quota scheme, and in the offshore market, the Chinese Ministry of Finance has guaranteed foreign central banks an allocation in auctions of its bonds, a move unprecedented by any sovereign

According to the International Monetary Fund’s (IMF) rules, the renminbi can’t be reported as an official reserve currency by central banks, because some controls on the currency remain in place, which means it’s not technically ‘freely usable’. This means that – in the eyes of the IMF – any sum invested in renminbi disappears from the reserves.

However, some central banks have started to report their offshore and onshore renminbi investments as official reserves anyway, indicating that they believe the criteria of ‘freely usable’ has been met in practice.

This is possible, despite IMF reporting rules, because central banks do not need to disclose the currency composition of their reserves when reporting to the IMF and the IMF does not rigorously scrutinise what is being reported, unless a country is under an IMF programme.

The move by central banks demonstrates the powerful role that both the public and private sectors are currently playing in shaping the renminbi future.

The IMF – with its central role in the international monetary system – is a particularly key player. If the renminbi were to be included in the IMF’s Special Drawing Rights (SDR) reserve asset (effectively a basket of reserve currencies), which is up for review next year, it would be a significant step up for renminbi internationalisation.

Effectively, inclusion in the SDR would serve as an official acknowledgement of the renminbi reserve-currency status, and central banks of all IMF member countries would automatically gain renminbi exposure through their SDR holdings. It would encourage new central banks to enter the renminbi market, and those already there to increase their allocations.

However, even without taking this step, the IMF could play a key role by setting out how renminbi investments can be reported ‘officially’ to ensure that smaller central banks and those on IMF programmes – for whom current reporting rules could be an issue – are not put off from investing in renminbi. In its approach to the renminbi, the IMF should let itself be guided by facts and technical analysis of renminbi usage, not by politics.

There is little doubt that the stability of the international monetary system would stand to be vastly improved, if central banks were allowed to manage their foreign reserves in a manner that reduces their vulnerability to external shocks. Given the dominance of China as a global trader, and the rapid internationalisation of its currency, for most central banks this will invariably mean investing a larger proportion of their foreign currency reserves in renminbi.

The writer is Managing Director and Global Head, Central Banks and Sovereign Wealth Fund at Standard Chartered, and previously worked for the IMF and the central banks of New Zealand and Finland

http://blogs.ft.com/beyond-brics/201...hold-renminbi/