Bundesbank: China’s yuan to be included in currency reserves

Germany’s central bank decides to include Chinese yuan in its own reserves in further boost to international status of currency

Speaking at an event in Hong Kong on Monday, Bundesbank board member Andreas Dombret said the decision was taken last year following an investment of €500 million by the European Central Bank (ECB), of which the German authority is a part.

He declined to comment on the amount that would be allocated.

“The renminbi is used increasingly as part of central banks’ foreign-exchange reserves – for example, the ECB included the RMB, but also other European central banks did so,” Dombret said during a speech in Hong Kong Monday.

Following the fanfare around the yuan’s acceptance to the International Monetary Fund’s reference basket of currencies, or Special Drawing Rights, in 2016, the march of the yuan has slowed down.

With capital controls still in place, the currency backed by the world’s second-largest economy has dropped to the sixth most-used worldwide from a record fourth ranking in August 2015, according to Swift data.

“It is not a major amount, but it is something we decided on and that we want to be part of,” Dombret, who is responsible for banking supervision at the Frankfurt-based institution, said in an interview with Bloomberg Television’s Stephen Engle.

“The fact the renminbi is now included in the SDR basket and the fact the ECB has decided to do that are both factors we thought about.”

Missteps on the path toward a more flexible yuan in 2015 prompted China to double down on capital controls, and there is no clear sign they will be lifted anytime soon.

Concerns about destabilising moves continue to prompt the government to keep a tight grip on the exchange rate.

The yuan strengthened by 6.8% against the US dollar in 2017.

Dombret said he shared concerns over the incomplete status as a freely floating currency, but, as a result of its inclusion in the SDR basket, his institution may need to fulfill some of its obligations using it.

China “can go further, and it’s their decision” on internationalising the currency, Dombret said, adding that it was much more used than before.

“There are obstacles – sometimes there are political interventions,” he said.

“It is not 100% predictable what kind of regulatory changes you may have.”

The Bundesbank has made efforts to set up Frankfurt as a European hub for trading the Chinese currency, though officials have said the facilities have been underused.

Dombret pointed to the gathering pace of the Belt and Road Initiative, through which China is seeking to establish new trade links with its Asian and European neighbors, as a factor that could accelerate the yuan’s usage.

“Clearly, as the second-largest economy in the world, policy initiatives in China are being felt around the world,” he said, while also noting that “trade links with China will intensify”.

Amid ongoing tensions between the US and China over a yawning trade deficit between the two countries – which US President Donald Trump blamed on a weak yuan during his election campaign – Dombret said the analysis by the Bundesbank showed the currency was not undervalued.

“According to our estimate, the estimate of the German central bank, the value of the RMB does not provide China’s exporters with a competitive advantage,” he said.

“On the contrary, the price competitiveness of the Chinese economy is estimated to be rather low, and, from that perspective, accusations of an undervalued RMB are actually not warranted.”

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