Bundesbank to include yuan in currency reserves

Bloomberg

Germany’s central bank has decided to include the Chinese yuan in its own reserves, in a further boost to the international status of the 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 euros ($611 million) by the European Central Bank, of which the German authority is a part. He said he wouldn’t 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 on 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 that 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 that the renminbi is now included in the SDR basket and the fact that the ECB has decided to do that are both factors we thought about.”
Missteps on the path towards a more flexible yuan in 2015 prompted China to double down on capital controls and there’s no clear sign they’ll be lifted anytime soon. Concerns about destabilizing moves continue to prompt the government to keep a tight grip on the exchange rate. The yuan strengthened 6.8 percent against the 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 internationalizing the currency, Dombret said, adding that it is much more used than before. “There are obstacles, sometimes there are political interventions, it is not 100 percent 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.”