Demand for renminbi is on the rise, with 30% of central banks planning to increase their exposure to the Chinese currency over the coming two years. This compares with just 10% last year.

This is among the findings in the Global Public Investor (GPI) 2021 report released by the Official Monetary and Financial Institutions Forum (Omfif) on Wednesday (July 21).

As part of the research, the independent think tank which focuses on central banking surveyed 102 global central banks, sovereign wealth funds and public pension funds on their asset allocation plans and investment strategies.

Over the longer term, the proportion of central banks that plan to increase their exposure to renminbi is 70%, the research found. Demand is particularly strong from African central banks: 50% plan to increase their Chinese currency reserves.

At the same time, central banks globally were expected to reduce their holdings of euro and dollar by 18% and 20% respectively – reflecting a desire to diversify away from traditional reserve currencies.

Jean-Claude Trichet

“I am not surprised by the results of the survey,” said Jean-Claude Trichet, former president of the European Central Bank, speaking at a webinar to present the results. “It goes without saying that China is occupying a major part in the global economy and expanding very rapidly,” he told the audience.

According to Trichet, renminbi accounts for only 2.5% of central banks’ currency reserves, compared with dollar holdings which account for 59%, and euro holdings, which account for 21%.

“Of course it’s going to increase a lot ... it’s overdue, in some respect,” he added.

However, he highlighted the renminbi’s lack of full convertibility - referring to restrictions that apply on capital account conversions - as a barrier to central banks’ holding of renminbi as a reserve currency on a larger scale.

“When full liberalisation of the currency comes, we will see the materialisation of the survey in real figures,” he said.

“The renminbi weight in the special drawing rights is around 11%, and the weight of China in global GDP is almost 20%.  In my mind these are clues that the weight of renminbi in reserves will still tend to rise over time...but the pathway might be bumpy as politics gets in the way from time to time,” said Gary Smith, managing director of Sovereign Focus.

INCREASING RISKS

The report also found that central banks were shifting their portfolios towards equities and riskier bonds in search of yield to meet liquidity and safety objectives.

Omfif estimated that the aggregate holding of listed equities by global central banks now stands at over $1.4 trillion, up from $1.1 trillion a year ago. As a percentage of portfolio, this equated to 8.8%. For Asian central banks, the percentage is higher still, at 10.5% - up from around 8% last year.

Meanwhile, the proportion of bonds and cash in global central banks’ portfolios had fallen from 81.8% in 2019 to 78.9% as of the end of 2020.

Asset allocations by institution, %. Source: Omfif GPI survey 2021 and Omfif analysis

Within fixed income, Omfif found that central banks were moving up the risk curve.

Central banks were favouring corporate bonds and higher yielding sub-categories of government bonds, such as supranational and emerging market sovereign bonds, over triple A-rated and developed market sovereign bonds, the study found.

Central banks were also eyeing green bonds for yield and were also integrating ESG considerations. Approximately 65% of central banks said they plan to increase their green bond holdings over the next 12 to 24 months, up from 45% last year.

Over 90% of central banks surveyed already invested in green bonds as part of their reserves, according to the report.

Interestingly, while 74% of central banks said they think looser monetary policies were having too large an influence on markets and pricing, only 40% believed they should be re-evaluated.

According to Omfif this indicates that, while the low interest rate policies pursued by central banks were posing a challenge to reserves managers, the majority felt the benefits of such policies currently outweighed the costs.