On Tuesday, June 4th, the Official Monetary and Financial Institutions Forum (OMFIF) indicated that due to low yields and geopolitical tensions, central banks around the world have shown a decreased interest in the Chinese yuan. More and more global reserve managers are now planning to increase their exposure to the high-yielding US dollar.
The US dollar is considered the currency closest to being a global reserve currency. Compared to any other currency, the dollar is the preferred payment method for many international transactions and serves as the primary reserve currency for countries worldwide, whether they are friendly or adversarial.
The prominent position of the US dollar globally also reflects people’s confidence in it. Despite calls for de-dollarization and “dumping the dollar”, the latest geopolitical tensions have prompted investors to turn to gold and the dollar as hedge tools during times of severe economic turmoil.
According to a Reuters report, the OMFIF released a survey on Tuesday. Among the reserve managers surveyed, 18% indicated their intention to increase exposure to the dollar in the next 12-24 months, a higher proportion compared to any other currency, driven by the dollar’s role in global trade and expectations of higher returns.
Conversely, demand for the Chinese yuan among reserve managers has stagnated.
Nikhil Sanghani, Managing Director of OMFIF’s Institute for Economic and Monetary Policy, stated: “This is the first year we’ve seen a significant number of reserve managers looking to reduce their holdings of the Chinese yuan.”
Among the 73 central bank reserve managers surveyed by OMFIF, approximately 12% plan to decrease their holdings of the yuan in the next 12-24 months, while 13% intend to increase their holdings.
In 2023, only 3% indicated their plans to decrease yuan holdings, while in 2022 or 2021, none had intended to reduce yuan holdings. During those years, over 30% of respondents planned to increase their exposure to the yuan.
“Many managers cited transparency in the (Chinese) market, as well as geopolitical factors, with returns mentioned at least in the short term – the policy rates in China (CCP) are low, and now you can get higher returns from US or European government bonds,” Sanghani said.
The yield on Chinese 10-year government bonds is approximately 2.3%, while that of US 10-year government bonds stands at 4.5%.
Strategists at Goldman Sachs stated that Chinese officials have been attempting to position the yuan as a challenger to the dollar on the global stage. However, the yuan’s lack of liquidity is insufficient to challenge the dominant status of the dollar, primarily due to strict capital controls imposed by the CCP that limit the amount of cash that can flow in and out of China.
Recent data from the International Monetary Fund (IMF) also confirms the dollar’s continued dominance. Data released by the IMF at the end of March showed that the dollar accounted for nearly 60% of global foreign exchange reserves.
According to analysis by ING Bank, the dollar’s share in global foreign exchange reserves saw a slight increase of 0.2% in 2023, while the yuan’s share declined for the second consecutive year on a year-on-year basis.
The survey further revealed that central banks worldwide plan to continue increasing their exposure to gold, a trend that has helped push gold prices to historic highs this year.
Approximately 15% of respondents expect to increase their exposure to gold this year. OMFIF estimates that if this trend continues, an additional $600 billion in reserves will be composed of gold in the coming years.
The World Gold Council reported that central banks continued their significant purchases of gold in the first quarter of 2024. Investments in gold bars and coins have also remained robust, with total demand increasing by 3% year-on-year to reach 1,238 tonnes, marking the strongest first quarter since 2016.