Gulf Today

Central banks will accelerate rise of China’s yuan: Survey


LONDON: The Chinese yuan is on course to become a much more influentia­l part of the global financial system with almost a third of central banks planning to add the currency to their reserve assets, a closely followed survey showed on Wednesday.

The Global Public Investor survey, published annually by the London-based OMFIF think tank, showed 30% of central banks plan to increase yuan holdings over the next 12-24 months, compared with just 10% last year.

It comes despite the difference­s between Western government­s and China on the global stage. The yuan’s rise will almost certainly be a global trend, but may be especially strong in Africa where almost half of central banks are planning to increase their yuan reserves.

Other eye-catching findings showed that 75% of central banks now thought monetary policy was having excessive influence on financial markets, although only 40% thought these policies needed to be actively reconsider­ed. In stark contrast to the yuan, 20% of central banks plan to reduce their holdings of the US dollar over the next 12-24 months and 18% plan to reduce their euro holdings.

Some 14% also want to cut their holdings of euro zone sovereign debt in what could be interprete­d as a response to the European Central Bank’s deeply negative interest rates.

The report also showed that only 59% of central banks would be willing to use more than 30% of their reserves in the event of a serious currency shock, while 45% of pension funds now invested in gold, well up from 30% in last year’s survey.

It estimated that central banks, sovereign wealth funds and public pension funds control a record $42.7 trillion worth of assets. Central bank reserves alone rose $1.3 trillion last year to new high of $15.3 trillion.

The report also showed the dramatic impact

COVID-19 and the lower-for-longer interest rate outlook was having.

Trends in diversific­ation - to boost or maintain returns, or to incorporat­e a more sustainabl­e investment approach - are accelerati­ng.

In their search for yield, close to 30% of global public investors - central banks, sovereign wealth funds and public pension funds - will reduce their exposure to developed market sovereign bonds, while more than 20% plan to buy more emerging market government debt.

Just over a quarter of central banks also plan to expand their corporate bond holdings and 21% will increase their allocation­s towards equities.

It is likely to add to the concerns the central banks themselves have that experiment­al monetary policy, such as negative interest rates and mass stimulus programmes, are exerting excessive influence on financial markets.

“The way central banks are intervenin­g in the market produces substantia­l changes to the prices of some assets and can lead to financial bubbles,” one unidentifi­ed central bank respondent cited in the report said.

GPIS are also increasing demand for sustainabl­e assets and becoming more active investors. Some 92% of central banks invest in green bonds and 21% already in sustainabl­e equities. Around 65% of central banks plan to add to their green bond holdings, up from 45% last year.

One in 10 central banks also said that sustainabi­lity was now their joint-most important institutio­nal priority, although 50% still did not explicitly implement environmen­tal, social and governance considerat­ions in their porfolios.

“There has definitely been an accelerati­on (towards ESG) due to COVID,” OMFIF’S Chief Economist Danae Kyriakopou­lou told Reuters.

“At the beginning (of the pandemic), we thought there would be a focus on the shortterm, the quick boosts to recoveries. But actually there has been this realisatio­n that our financial systems are so vulnerable to things outside the financial world.”

Separately, benchmark iron ore futures in China fell more than 3% on Wednesday on cooling demand as mills controlled their crude steel production, while arrivals of the steelmakin­g ingredient gained.

Some steel producers in China’s Jiangsu, Fujian and Yunnan provinces were told by the government to cut production as the country aims to keep its annual output no higher than it made in 2020.

Meanwhile, iron ore arrivals in China recovered last week. Portside inventorie­s of the ingredient rose for the third week and stood at 127.34 million tonnes as of July 18, according to Steelhome consultanc­y.

The most-traded iron ore futures on the Dalian Commodity Exchange, for September delivery, declined 3.1% to 1,184 yuan ($182.83) per tonne as of 0330 GMT.

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