A rise in bond yields in China versus a fall in interest rates in the US and other developed economies this year has enticed more foreign investors into the Asian country’s domestic fixed income market.
Additionally, the fact the People’s Bank of China (PBoC) has not intervened in the foreign exchange market amid the Covid-19 pandemic — in stark contrast to its decision to depreciate the currency in 2015 — has also proven appealing.
“The PBoC is letting the exchange rate move around a little bit against the dollar and intervening less,” Shaun Roache, Asia Pacific chief economist at S&P Global Ratings, told GlobalMarkets.
“Yet, they are not suffering the same sort of instability as in 2015/2016. In a world where public debt in the advanced economies is rising sharply, rates are at zero and there is a lot of QE, there is increasing appetite in China again to talk about the global role of the renminbi.”
Roache added that policymakers in the rest of Asia were also weighing this up. “There is a feeling that some good can come if everybody can reduce their reliance on the dollar,” he said. “In large part, that decouples you from the dollar cycle, which really dictates financial conditions across Asia Pacific.”
Historically, the direction of the dollar has been important for Asian countries. When the dollar strengthens, the debt burden for sovereigns rises.
The renminbi has gained steam globally in recent years. The International Monetary Fund added the renminbi to its special drawing rights basket in October 2016, with the currency having a weighting of 10.92% versus the dollar’s 41.73%.
The IMF’s claims in renminbi rose from $212.8bn in the second quarter of 2019 to $230.4bn for the same time this year.
“Unpredictable policies, like the use of sanctions, have at the margin undermined the role of the dollar as an international reserve currency,” said Stephen Schwartz, head of Asia Pacific sovereign ratings at Fitch.
“While dollar holdings by global central banks have barely budged, there has been an increase in RMB holdings. But while there is renewed interest in an alternative to the dollar, it’s a very market-driven process and quite difficult to dislodge the role of the dollar at this stage.”