In financial terms it’s just a small step, but a highly symbolic one. Germany’s central bank plans to include the Chinese yuan, also known as the renminbi, in its foreign reserves for the first time, in belated recognition of the surging economic power of the world's most populous country. On Monday, the news boosted the yuan to its strongest level in more than two years against the US dollar.
“The decision to accept the yuan is part of a long-term strategy of diversification and reflects the increased role of the Chinese currency in the global financial system,” Bundesbank board member Joachim Wuermeling said in a statement. While the central bank declined to divulge the amount, it said the decision was made last summer. The Bundesbank hasn't yet carried out the purchase, saying technical preparations were necessary.
The Bundesbank is following the lead of the European Central Bank, which announced last June that it had bought the equivalent of €500 million ($613 million) in yuan during the first half of 2017, after agreeing to take the step the previous January. This amounted to a tweak because the yuan makes up a scant 1 percent of the ECB's foreign reserves, compared with 82 percent in dollars and 17 percent in Japanese yen.
The Bundesbank’s plans mark progress in China's drive to establish the yuan as a global reserve currency. “The Bundesbank is taking account of the fact that China’s share of the world economy has increased significantly,” said Stefan Kooths, head of economic forecasting at the Kiel Institute for the World Economy.
The Bundesbank is the first major non-Asian central bank to include Chinese yuan in its currency reserves.
While some Asian central banks have voiced a desire to incorporate the Chinese currency in their reserves, the Bundesbank is the first major central bank outside the region to actually do so. This rejigging of reserves is sensible because Germany’s export-oriented economy has deep trading ties with China.
Bundesbank board member Andreas Dombret said one aim was to gain a better understanding of the market for Chinese government bonds. The Germans had followed a cue from the ECB but was also reacting to a 2016 decision by the International Monetary Fund to include the yuan in the basket of reserve currencies that make up its in-house currency, so-called Special Drawing Rights. The yuan joined the dollar, the euro, the Japanese yen and British pound in that illustrious club.
In fact, since the Chinese currency entered the SDR basket, there has been a small but steady increase in allocation towards the yuan, according to a quarterly IMF report on the composition of the foreign exchange reserves held by global central banks. In the latest report dated September 2017, global central banks allocated the equivalent of $107 billion in the Chinese currency in their reserves – a 19 percent increase from a year before.
Still, the yuan’s role in international payments lags far behind China’s status as the world’s second-largest economy. That’s largely because the exchange rate of the yuan is linked to the dollar’s value. The Chinese central bank fixes a daily midpoint for the yuan’s exchange rate and allows the currency to move no more than 2 percent above or below it. To keep the exchange rate stable, there are strict limits on foreign exchange trading in the currency.
Nonetheless, Beijing has cautiously allowed the yuan to float higher against the dollar. In 2017, the Chinese currency appreciated by 6.3 percent against the greenback, prompting US officials to praise China for acting to avoid a "disorderly" appreciation of the yuan. During his presidential campaign, Donald Trump had slammed the Chinese for alleged currency manipulation and threatened to levy punitive tariffs in order to bring down the US trade deficit.
Sha Hua is a correspondent for Handelsblatt in Beijing, while Jan Mallien covers monetary policy from Frankfurt. Jeremy Gray is an editor for Handelsblatt Global. To contact the authors: [email protected], [email protected] and [email protected]