BUNDESBANK-YUAN Bundesbank Says It'll Add China's Yuan to Currency Reserves

HONG KONG, 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 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.”

The German central bank will make its renminbi investment once organizational and technical preparations have been completed, a spokeswoman said in a statement read over the phone.

“The Bundesbank regularly reviews the composition of its currency reserves in terms of risk and return,” board member Joachim Wuermeling added in emailed comments. “The decision to accept the yuan is part of a long-term diversification strategy, reflecting the increased role of the Chinese currency in the global financial system.”

Doubling Down

Missteps on the path toward 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.”

Trade Tensions

Amid ongoing tensions between the U.S. and China over a yawning trade deficit between the two nations -- which U.S. President Donald Trump blamed on a weak yuan during his election campaign -- Dombret said the analysis by the Bundesbank shows the currency isn’t undervalued.

"According to our estimate, the estimate of the German central bank, the value of the RMB does not provide China’s exporters with a competitive advantage," he said. "On the contrary, the price competitiveness of the Chinese economy is estimated to be rather low and from that perspective accusations of an undervalued RMB, they are actually not warranted."