IMF Releases Report on Foreign Reserves Holdings by Currency
Last year the Chinese Renminbi entered the SDR currency basket with some fanfare. China has been working hard to get its currency more globally accepted both in trade and as reserve holdings. However, so far things are off to a slow start. The IMF released their latest report on reserves by currency and included the Renminbi. This article in BreakingViews explains why the Renminbi is struggling to gain acceptance so far. Below are some excerpts.
"When Deng Xiaoping set China on the course of market-oriented reform nearly 40 years ago, he called his pragmatic and incremental approach “stepping on stones to cross the river.” The Chinese currency’s much-ballyhooed entry into global finance has landed on a very small stone indeed.
The yuan accounted for just over 1 percent of global foreign-exchange reserves in the fourth quarter of 2016, according to the International Monetary Fund’s first such breakout, released on Friday. The $85 billion worth of renminbi holdings reported by countries who disclose the currencies of their reserves was barely half what they keep even in Canadian dollars, and a tiny fraction of the $1.6 trillion worth of euros and $5.1 trillion of dominant U.S. dollars."
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"Such shifts happen slowly, of course. However, the tiny impact so far may also reflect how much shine has come off the yuan’s international credentials. Chinese President Xi Jinping’s government has gotten cold feet about liberalization. The authorities’ clumsy effort to halt a stock-market swoon in 2015 worsened the selloff. Their heavy intervention to prop up the renminbi subsequently burnt up about a trillion dollars of reserves. Lately the government has sought to stifle efforts by companies and individuals to move money offshore.
The use of the yuan in global trade has, if anything, gone into reverse. It accounted for 1.7 percent of payments in December, down from 2.3 percent a year earlier, according to payments network SWIFT. That’s consistent with the weak uptake shown in the IMF data."
My added comments: Here we have another example of why we talk about the reduced role of the US dollar around the world as being a slow process. Despite a lot of news about all kinds of things that will replace it, so far the US dollar remains the primary reserve asset by far. Change is taking place, but at a very slow pace. Russia and China are clearly trying to move towards less dependence on the US dollar, but we still think it will take a new major global financial crisis to speed up the pace of change. We'll continue to keep an eye on it here.
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