LONDON Jan 14 Central banks increasingly want
to hold yuan as trade with China grows, a move that would boost
the currency and turn it into a far greater cog of world
The question is by how much the currency will be bought and
over how long a time.
Gary Smith, the global head of official institutions at BNP
Paribas Investment Partners -- a firm that manages 54 billion
euros ($72 billion) for central banks, sovereign funds and
supranational groups -- thinks it will be a lot and soon.
"My estimate of central bank holdings (of yuan now) is 0.5
percent or perhaps even less. My estimate of where we're going
to is over 10 percent over the next 3 or 4 years," he said,
adding that the uncertainty was timing, not percentage.
"The renminbi (yuan) story will just continue to grow at an
exponential pace. We begin from such a small start point and
it's such a big story," he said.
Smith's forecast is more bullish than many of his peers,
which are generally for a gradualincrease of the world's second
biggest economy's closely controlled currency in central banks'
It would also be a sharp jump from estimates that the yuan,
also known as the renminbi, currently accounts for a minimal
share of the world's $10.8 trillion reserves.
But there is little argument about the direction of travel.
"There is an important trend there," said Patrick Thomson,
global head of sovereigns at JP Morgan Asset Management, which
manages $70 billion of assets from sovereign investors.
"The way central banks look at calculating reserves is based
on trade balances, so as trade with China grows, they will want
to hold more and more renminbi."
BNP Paribas' Smith bases his forecasts on discussions with
central banks he wished to keep confidential, steps taken by
China to facilitate foreign central banks' yuan investments and
on the fact that private sector payments in renminbi are growing
This, he said, will in turn push central banks to hold more
of the currency.
"A lot of central banks hold some renminbi now, all of them
in very very small amounts. Every single one will hold more at
the end of the year than they do today," he said.
The International Monetary Fund, which monitors central
banks foreign exchange reserves, does not publish estimates for
the yuan, but says that all currencies beyond the five main ones
-- U.S. dollar, euro, yen, British pound and Swiss Franc --
account for only 5.5 percent of known reserves.
The dollar, by contrast, comprises 61.8 percent.
China is the world's largest exporter and second largest
economy, but the lack of full convertibility of the yuan,
capital controls and the difficulty in getting access to
yuan-denominated assets mean it is not an official reserve
It has nonetheless signed currency swap agreements with more
than 15 countries, including South Korea. Countries including
Indonesia have publicly announced that they are buying bonds on
China's interbank market. Nigeria has also said it wants to make
the yuan a reserve currency.
Sovereign wealth funds and central banks have also noted
Beijing's decision just before year-end to remove a $1 billion
limit for them to buy Chinese assets through its Qualified
Institutional Investor Programme.
International payments in yuan surged 24 percent in November
from the month before, to a record 0.56 percent of global total,
transaction services organisation SWIFT said.
But the speed and size of the move remains at issue.
"More and more central banks will start holding modest
amounts of renminbi in their reserve portfolio over the next 3
to 5 years," said Eswar Prasad, a Cornell University economics
professor and senior fellow at the Brookings Institution.
"But unless the Chinese government significantly steps up
its program of capital account liberalisation and unless Chinese
financial markets develop rapidly ... I find it difficult to
conceive the Chinese renminbi becoming such an important
currency in such a short period," said Prasad, a former head of
the IMF's China division.
The People's Bank of China said on Friday it would seek to
improve the yuan's convertibility but added at the same time
that it would step-up monitoring of cross-border capital.