China's yuan could become the world’s third-largest reserve currency in the foreseeable future due to increased foreign investment in Chinese companies, analysts at Morgan Stanley conclude in a report distributed Friday (Sept. 4) and cited by CNBC.
The shift would put the yuan behind the U.S. dollar and the euro. Reserves are funds central banks hold in currencies other than their own.
China has been pushing testing forward on a central bank digital currency (CBDC) with retail applications as well as four Chinese banks creating interfaces for a digital yuan. China reportedly has a goal of having a digital yuan in use at the 2022 Winter Olympics.
As of the end of the first calendar quarter of this year, the International Monetary Fund lists the world’s leading reserve currencies as the U.S. dollar, the euro, the Japanese yen and the British pound, followed by the yuan, the Canadian dollar and the Australian dollar.
Making the yuan, also called the renminbi, a more popular reserve currency has been an objective of the Chinese government for years.
“We expect private and reserve managers will generate more than US $150 billion in total portfolio inflows to China in 2020, for the third consecutive year, highlighting the transformations underway,” the Morgan Stanley report said, per CNBC. “The annual inflow should reach US $200-300bn in 2021-30.”
James Lord, international strategist at Morgan Stanley, wrote in the report that a combination of factors “suggests global central banks will need to hold more RMB as part of their reserves,” the news outlet reported.
Michael Pettis, professor of finance at Peking University, disagreed with the assessment, CNBC said. “I continue to be very skeptical about any dramatic rise in the RMB as a major reserve currency,” he reportedly said in an email.
The Morgan Stanley analysts also offered reason in their report that they could be wrong, according to CNBC.
A key factor in a currency’s attractiveness as a foreign reserve holding is its stability as well as the stability of the economy that underpins it. COVID-19 has shown the Chinese banks are susceptible to the same pressures as banks elsewhere.
Even as foreign bankers mull how much yuan to hold, some bankers in China see the potential for an extremely significant change at home — the shift in the yuan from a paper currency to a digital-only currency.