According to the International Monetary Fund’s World Currency Composition of Official Foreign Exchange Reserves (Cofer) report up to 4Q2023, the share of official foreign exchange reserves held in renminbi (RMB) has decreased y-o-y.
Since the RMB appeared in 2016 in the Cofer league table, its share has risen from 1.09% in 4Q2016 to 2.29% in 4Q2023. However, since its peak of 2.83% of global foreign exchange reserves in 1Q2022, the RMB has fallen to 2.29% as of 4Q2023.
Despite the weaponisation of the US dollar during Donald Trump’s presidency and the sanctions on Russia following its full-scale invasion of Ukraine in February 2022, the US dollar has remained relatively stable at 58% of global foreign exchange reserves. This is only a slight decline from 63% in the fourth quarter of 2016.
So, which currencies have gained more traction? The Australian dollar (AUD) and Canadian dollar (CAD) have been internationalising under the radar.
In 4Q2016, when the world was expecting the RMB to internationalise as a competitor to the dollar, the AUD comprised 1.69% of global foreign exchange reserves. As of 4Q2023, that portion has risen to 2.11%. The Canadian dollar, which accounts for 2.58% of foreign exchange reserves at 4Q2023, has overtaken the RMB.
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In a June 11 IMF blog titled "Dollar Dominance in the International Reserve System" by Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell, the authors say the reduced role of the US dollar over the last two decades has been accompanied by a rise in the share of non-traditional reserve currencies. These include AUD, CAD and the Singapore dollar.
The authors also note that nontraditional reserve currencies appeal due to their attractive yields. Furthermore, new digital financial technologies have made these currencies increasingly easy to buy, sell and hold.
Meanwhile, economists at Natixis CIB say China’s economic conditions are driving an expansionary monetary policy, resulting in a weaker RMB. This perspective was shared by Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis CIB; along with Jianwei Xu, senior economist for Greater China; Gary Ng, senior economist for thematic research in Asia Pacific; and Haoxin Mu, economist for thematic research in Asia Pacific; during a recent webinar.
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“The Chinese government is putting many resources in the manufacturing sector and focusing on a sector whose output is lower, which is why China is experiencing deflation,” say Herrero and her team.
Among the expansionary steps taken to kickstart the economy, the People’s Bank Of China (PBOC) has reduced policy rates and the reserve ratio requirement (RRR). These steps, coupled with a hawkish Federal Reserve and other developed market central banks, have caused the RMB to weaken.
Herrero says: “On the one hand, the RMB is internationalising, but that process is reaching a plateau. The key force [for using the RMB] is funding. If I borrow, rates are falling and the RMB depreciates, which is better for me. On the other hand, the investment side worries about the future value of the RMB and its lower yield. If I want to choose an optimal currency, I will choose one that gives me the potential to appreciate rather than depreciate.”
Additionally, the Natixis economists have said that investors have started to worry about China’s risk. “Investors prefer safer assets than RMB assets,” they add.
The RMB’s internationalisation is slow due to its framework. First, it is not fully convertible on the capital account, limiting its free movement in and out of China.
Second, the legal framework for RMB payments is uncertain, reducing investor confidence in China’s rule of law, as noted by Herrero.
Third, China’s financial markets are less liquid and developed than those in the US.
Notwithstanding challenges, the Natixis economists note that the RMB’s internationalisation continues in the Global South, especially regarding funding. For example, China assists Zambia with debt restructuring and working capital and is Sri Lanka’s largest bilateral creditor.
The bottom line is that increasing use of RMB is inevitable as more countries that took part in Belt and Road Initiatives in the Global South restructure their debt, market observers have indicated.
