According to the news story by Bloomberg, Goldman Sachs Group Inc.’s analysts predict that the Chinese Yuan is set to gain larger shares of the world Forex reserves and that the US Dollar and the Japanese Yen will therefore have to give up some of their market share to make room for the growing Yuan.
Despite the fact that the Yuan has fallen quite a bit in the last few months, there has been an acceleration in overseas inflows into Chinese fixed incomes. This actually, according to Goldman, showcases the strength of allocation demand for the world’s third largest bonds market.
Goldman Sachs analysts feel that over the next five years up to 2022, central banks will account for about $250 billion of a predicted $1 trillion worth of net inflows into the Chinese bonds market.
Goldman’s analysts Danny Suwanapruti, Andrew Tilton and Michael Cahill wrote in a note to clients last Friday that outflows or reserve allocations from China could be more concentrated in US Dollars and Japanese Yen. Since most central banks already hold the majority of their reserves in US Dollars, it makes logical sense to use the USD as a natural source of funding.
The three analysts also wrote that the rise in the Chinese Yuan’s or Renminbi’s importance would impact the Japanese Yen much more since the Japanese currency would no longer be the only reserve currency in Asia.
Goldman also predicts that another $522 billion may come from other markets into the Chinese bonds market over the next 5 years after China’s inclusion in major global benchmarks. For the sake of simplicity and making the analysis easier, Goldman said the assumption taken was that assets under management would remain static.
Based on that assumption, Goldman predicted that there would be an inflow of $1 trillion in to China from wealth funds as well as private fund managers over the next five years.
Correspondingly, outflows from Japan are expected to be at the $66 billion range, which is about 12% of the Japanese government bonds that are held by foreign entities.
Similarly, the outflows for US government bonds are pegged at $280 billion. However, that only totals up to about 4% of the total foreign holdings in US Treasuries.
Another country that is expected to lose out due to China’s entry into the global stage is Thailand. The South East Asian country can expect an outflow of $3 billion, which is around 14% of Thailand’s debt.
China has been slowly but steadily opening up its markets at home to foreign investment. This is a part of the country’s bigger attempt at creating a stable exchange rate for its currency, especially given the massive demand among Chinese citizens to invest money overseas. In fact, just last week, the Chinese State Council agreed to exempt foreign organizations from certain taxes.
According to Goldman Sachs’ analysis, the Chinese Yuan’s share of reserves in the world – as estimated by the International Monetary Fund – should grow by 3% to 4% in the next 5 years through to 2022.
If the financial markets worsen even faster that they have estimated, then, says Goldman, these estimates of China’s growing share in global reserves could prove to be too conservative.
There are, however, certain risks that need to be kept in mind, says Goldman. This includes the fact that reserve allocation decisions can tends towards “stickiness”.
At the end of the day, at this point, say Goldman’s analysts, the outlook is that the Chinese Yuan will remain less than that British Pound as well as the Japanese Yen in worldwide reserves.