February 25, 2015 / 4:57 PM / 5 years ago

Yuan reserves set to rise by $500 billion over 5 years: banks

LONDON (Reuters) - More than 60 central banks hold China’s yuan in their currency reserves and the amount held there and in sovereign wealth funds should grow by $500 billion over the next five years, China-focused bankers said on Wednesday.

An employee carries bundles of 100 yuan Chinese bank notes to store after counting at a bank in Taiyuan, Shanxi province July 4, 2013. REUTERS/Jon Woo

Speaking at an Association for Financial Markets in Europe conference in London, Massimiliano Castelli, UBS Asset Management's head of strategy for sovereign markets, said data and discussions with clients suggested the yuan CNY=CFXS made up around 0.1-0.3 percent of global reserves.

He said that should grow to 2 percent over the next five years. Adding holdings of the big sovereign wealth funds run by a number of major commodity-producing economies, that would push half a trillion dollars into the currently tightly-controlled onshore market in yuan, also known as the renminbi, or RMB.

“You are going to see the central banks growing their exposure to the RMB,” Castelli said. “This will happen by them moving onto the onshore market because the offshore market in renminbi is too thin.”

The International Monetary Fund will consider this year whether to add the yuan to the small group of currencies that make up the SDR basket it uses to measure flows between members and reserves.

Panel members, including senior officials from Asia-focused banks HSBC and Standard Chartered and the International Finance Corporation, said central banks were ahead of that curve.

“Whereas two years ago central bank managers were asking me about the yuan, now I am asking them how much they are holding,” said Bobby Vedral, a managing director dealing with Chinese investment at Goldman Sachs.

“Technically, of course, the yuan can now be part of the IMF basket. But on this side we are seeing that the Chinese are not waiting for it to happen, they are doing it. As the world is moving to settle trade in RMB, that naturally means central banks have to hold the minimums to cover imports.”

Speakers also said China would move swiftly to increase flows from the offshore market in yuan, which has soared in value over the last year, into China itself.

Vedral said he expected the announcement soon of a bond equivalent of the link that allows investors in the Shanghai and Hong Kong markets to trade shares on the other market using their local brokers and clearing houses.

Editing by Jeremy Gaunt

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