© Reuters. FILE PHOTO: An advertising poster promoting Chinese renminbi (yuan, US dollar and euro) exchange services abroad at a foreign exchange shop in Hong Kong, China August 13, 2015. REUTERS/Tyrone Siu
Written by Jimmy MacGyver
ORLANDO, Fla. (Reuters) – It faces significant long-term hurdles to becoming a global reserve currency for any major import, but the biggest near-term challenge is the fact that no one wants to buy Chinese bonds.
Foreign investors have been dumping Chinese bonds since Russia invaded Ukraine in February last year, fearful that Beijing’s ties to Moscow could expose overseas holders of Chinese assets to international sanctions.
The reversal was surprising – non-residents had been pumping money into Chinese debt securities almost every month for the previous decade – and so far, it has persisted.
Figures compiled by macroeconomic research firm Exante Data through March of this year show that foreigners have been selling Chinese bonds heavily every month except for one since Russia invaded Ukraine.
“It’s very difficult to create a reserve currency, without attractive reserve assets. China has a problem. It wants foreigners to buy bonds, but they’ve been selling since early 2022,” says Jens Nordvig, founder and CEO of Exante Data.
“Both the private sector and the official sector are reducing exposure to the yuan in their fixed income portfolios,” Nordvig adds.
Exante Data figures show that foreign investors net bought $558 billion worth of Chinese bonds between 2010 and 2021. From February last year to March this year, they sold $115 billion.
DE-DOLLARIZATION?
The global debate on “de-dollarization” has recently found a new lease of life.
The dollar’s nominal share of global reserves is 58.35%, according to the International Monetary Fund’s currency composition of official foreign exchange reserves, or COVER data, the lowest since the launch of the euro in 1999.
Several countries, including Brazil and other major emerging economies in Asia and the Middle East, have called for trade billing in oil, commodities and other global commodities in currencies other than the dollar.
Sure enough, the renminbi’s share of global foreign exchange reserves has more than doubled in the past seven years to 2.69%, according to Cofer data from the International Monetary Fund.
It has grown much faster than the yen, the pound, and currencies like the Australian and Canadian dollars and the Swiss franc are grouped together in the “others” category in Cofer’s data. But from a much lower base.
The nominal amount of global reserves in renminbi reached $298 billion at the end of last year, down from a peak of $337 billion 12 months earlier.
But in a pool of $12 trillion in global reserves, nearly 80% of which is denominated in dollars and euros, these are very small numbers. There is a long way to go for the Yuan to reach the Sterling and Yen levels of 4.95% and 5.50% respectively.
booking status
Any currency that designs to reach international reserve status must meet several criteria and fulfill several roles.
It should be widely accepted as a reserve unit for central banks, a unit of account for international trade, and a transactional currency for trading in global financial assets such as stocks and bonds.
Beijing has gradually allowed more institutions and central banks to enter the yuan-denominated bond market over the past two decades by relaxing rules around quotas, lock-out periods and registration requirements.
But as Jonathan Fortun, an economist at the Institute of International Finance, notes, it’s a slow and uneven process, and it will be slower and more uneven because of the recent sell-off in Chinese bonds.
“Any episode of large outflows concentrated in one place, as has been the case in China for most of last year, would be detrimental to a currency achieving reserve status,” Fortun said.
The Institute of International Finance’s capital flows data show some minimal net inflows to China in recent months, but paint a broadly similar picture: demand for Chinese debt has evaporated.
The reluctance to own Chinese bonds comes amid mounting pressure from Washington on its G7 allies to impose restrictions on certain investments in China that have implications for national security. It was not reached in the G7 closing statement, which indicates that other G7 members are less enthusiastic.
But Washington is likely to continue to pressure its allies to take a stand against what it views as Beijing’s use of “economic coercion” against other countries.
Beijing, in turn, could see this as the thinning end of the wedge, an effective call for companies, institutions and investors in some of the world’s richest countries to move away from China and allocate capital elsewhere.
Which is what bond investors already do, at least.
(The opinions expressed here are those of the author, a Reuters columnist.)
(Writing by Jimmy MacGyver; Editing by Simon Cameron Moore)