July 6 (Markets Insider) – Central banks are increasingly keen to hold China’s yuan as a reserve currency, as the country’s growing economic and political power threatens to erode the US dollar’s global dominance.
Some 85% of central banks said they are invested, or are considering investing in, China’s yuan in UBS Asset Management’s annual reserve manager survey, released Friday. That’s up from 81% a year earlier.
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Foreign exchange managers at central banks are on average looking to hold 5.8% of their reserves in the yuan in 10 years’ time, up from 5.7% last year. That would be a sharp increase from the 2.9% level reported by the International Monetary Fund last week.
The US and its allies’ freezing of Russia’s foreign exchange reserves in response to the invasion of Ukraine has driven speculation that countries will diversify away from the dollar, so as to be less exposed to Washington’s power over the global financial system.
Foreign exchange reserves are used to protect domestic currencies and to deploy at times of crisis. UBS surveyed 30 top central banks between April and June.
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Central banks’ average share of US dollar holdings was 63% as of June 2022, the survey showed, down from 69% in the previous year. However, UBS said fewer Latin American banks, which typically hold more dollars, were surveyed this year.
Russia’s invasion of Ukraine and Beijing’s close relationship with Moscow — as well as China’s breakneck economic growth in recent years — has increased talk about a “multipolar” world, in which the US is no longer the overwhelmingly dominant force.
More than 81% of respondents to the UBS survey said China’s yuan, also called the renminbi, would benefit from a shift to a “multipolar” world. Some 46% said the dollar would benefit, in a sign of the asset’s appeal during times of economic or geopolitical tension.
“The renminbi continues its steady rise to reserve currency status,” UBS’ analysts said in the report.
However, despite the increased interest in the yuan, the currency remains far away from challenging the dollar for the top spot in global reserves.
Some analysts have said Beijing’s autocratic leadership makes holding any Chinese assets risky. Meanwhile, doubts have grown about the economy over the last year as the property sector has wobbled and President Xi Jinping’s zero-COVID policy has hampered growth.
Investors have snapped up the dollar this year as the Federal Reserve has hiked interest rates, pushing up US bond yields. The dollar index has risen almost 10% this year to around 105, close to its highest level in 20 years.
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