Five Investment Themes in the Year of the Dog
4. The Renminbi as a Reserve Currency
Chinese authorities are working hard to liberalize debt as well as equity markets. The renminbi is beginning to reflect the attributes of a «reserve currency,» as its importance grows on the international stage. Last month, the German central bank announced that it would include the Chinese currency in its basket of reserve currencies. This followed on the heels of the European Central Bank switching 500 million euros worth of its dollar reserves into yuan. It wasn’t that long ago, 2016 in fact, that the Chinese currency joined the International Monetary Fund’s Special Drawing Rights basket of currencies, going from 0 percent to over 10 percent of the IMF total.
This reflects the importance of China as a global trade powerhouse, as well as the hard work that is ongoing in China to repair its reputation and become a major world currency. Although we don’t see China replacing the greenback as the world’s reserve currency anytime soon, the effect of incremental increases in reserve holdings could continue to boost the currency’s value, with knock-on effects for other areas of the economy.
