China’s Global Currency Ambitions Falling Flat With Central Banks as the yuan accounted for only 1.1% of foreign-exchange reserves in 2016.
The Chinese yuan accounted for only 1.1% of global foreign-exchange reserves last year, the latest sign that China is meeting resistance in its effort to make the yuan a global currency.
A quarterly report from the International Monetary Fund on Friday showed that central banks held $84.5 billion in yuan reserves in the fourth quarter, the first time the IMF reported central bank holdings of the Chinese currency.
China has been taking steps in recent years to encourage more central banks and other investors to hold the currency, such as providing more details about its currency policies and its own reserve holdings.
The central bank’s limited yuan positions indicate that global policy makers remain cautious toward China. They are worried about Beijing’s tight control over the currency, still-limited transparency in its financial markets and rising debt that many fear is distorting prices. The People’s Bank of China sets the yuan’s value daily and then allows it to trade within a 2% range on either side of the fix.
“China is the second-largest economy and for its currency to only account for 1% of foreign-exchange reserves is very modest,” said Eswar Prasad, a Cornell University professor and the former head of IMF’s China division. “This is certainly not showing a path for the renminbi becoming a world-class reserve currency.”
Investors also worry that Beijing could devalue the currency again, as it did in August 2015, when a surprise 2% devaluation rattled markets around the globe.
“The concern is that you stick a lot of official reserves with a currency that’s overvalued and might be subject to a devaluation at some point,” said Sebastien Galy, a macro strategist at Deutsche Bank .
China achieved an important milestone in October, when the yuan was added to the IMF’s elite basket of reserve currencies that the organization uses to denominate for emergency loans.
Some analysts had expected that decision would lead central banks to boost their holdings in the yuan. The IMF assigned it an 11% weighting in the basket, less than the dollar and euro but ahead of the Japanese yen and British pound.
Based on the size of the Chinese economy, central banks should be holding about 20% of reserves in the yuan, Deutsche Bank said. But the German bank predicted before the release of the IMF numbers that the yuan would make up 1% to 2% of global central-bank reserves.
Allocations to the yuan have been little-changed in recent years. An IMF report estimated that about 1.1% of the official foreign reserves were held in yuan in 2014, though the countries included in that report differed from those in Friday’s data.
The modest central bank holdings are a setback for China after it spent years trying to globalize its markets and economy. As part of those efforts, China has taken steps to open its onshore stock and bond markets to foreign investors and allow its currency to move more in-line with market forces.
Last summer, global index provider MSCI Inc. said it wouldn’t include China’s stocks in its benchmark emerging markets index amid concerns about the market’s openness and transparency.
In recent months, the PBOC has indicated keeping the yuan stable is a priority while the internationalization of the currency remains a medium- to long-term goal.
Another risk is that Chinese assets could be roiled by rising trade tensions. The Trump administration has threatened to name China a currency manipulator and impose tariffs on its goods. President Trump tweeted on Thursday that a meeting scheduled next week with Chinese leader Xi Jinping “will be a very difficult one in that we can no longer have massive trade deficits.”
WALL STREET JOURNAL with files from BLOOMBERG