Has the RMB become a safe haven currency?

On 24 February 2022, the Chinese renminbi (RMB) reached a nearly four year high of 6.3095 against the United States (US) dollar, the same day that Russia started a large-scale military attack on Ukraine. The RMB had not reached this level since April 2018. Later news confirmed that the RMB was pushed up by unprecedented demand from European asset managers for China’s treasury bonds due to the crisis. Although it is still too early to say that RMB has become a safe-haven asset like the US dollar, it is a safe bet that the RMB has become a crucial part of global asset managers’ investment and risk mitigation portfolios.

The share of RMB denominated assets held by foreign investors has soared since 2019 when China made clear its commitment to further open up its capital market. According to Hong Kong Exchange (HKEX), global investors held a total of RMB 2.6 trillion ($411.8 billion) in China’s A-shares listed on the Shanghai and Shenzhen exchanges as of 10 November 2021, almost doubled the RMB 1.44 trillion ($228.1 billion) at the end of 2019.

More interestingly, the Chinese bond market has out-performed Chinese equities as far as foreign investors are concerned. China Central Depository and Clearing Company (CCDCC)’s data showed that foreign holdings in the China Interbank Bond Market (CIBM) reached RMB 3.68 trillion ($584.1 billion) as at end of fourth quarter (Q4) of 2021, a 196.24% increase from the same quarter in 2019. On a percentage term, foreign holdings increased from 3% to 4.4% during the same period.

The increased foreign holdings of RMB assets could in part be driven by the monetary policy divergence between China and the US amid the COVID-19 pandemic, when the US Federal Reserve (Fed) signaled a tapering of its monetary easing stance while the People’s Bank of China reduced banks’ statutory reserves requirement ratio (RRR) to keep interest rates low. The data seems to corroborate this. The spread of 10-year treasury bonds between the US and China has narrowed from around 180 basis points (bps) in early 2021 to below 100 lately. Especially since PBOC cut RRR during the second half of 2021. 

And even though the yield for RMB assets has eroded, global fund managers have shown continuous interest in China’s capital market. Foreign holdings as a percentage of China’s total treasury bonds increased from 11% in March 2021 to 12% in January 2022. On the contrary, foreign holdings as a percentage of the US’ treasury bonds went the opposite direction, decreased from 36% in Q4 2019 to below 30% in Q3 2021.

The marked move towards China treasury bonds appears to be driven by global investors’ sentiment about the RMB’s continuous appreciation against the dollar. The RMB has appreciated about 4% against the USD since March 2021, backed by strong demand for RMB in cross-border trade and settlement. SWIFT data showed that RMB remained the fourth most active payment currency as of January 2022, and its share of payment currencies used increased to 3.2% from 2.42% a year ago. 

Meantime, offshore RMB deposits hit a record high of RMB 1.09 trillion ($173 billion) at the end of January 2022 according to the latest release by Hong Kong Monetary Authority (HKMA), exceeding the RMB 1 trillion ($158.4 billion) threshold for the second time since 2014.

With these fundamentals to support a strong RMB, the Chinese regulators are also concerned about the use of the RMB for carry trade and other speculative investments that will increase market volatility and systemic risk. In November 2021, the China Foreign Exchange Committee warned banks against currency speculation and to take a prudent approach to proprietary trading.

Looking ahead into 2022, as the Fed enters a tightening cycle, the trend to increase holdings of RMB assets is expected to continue, and the Ukraine crisis could just accelerate it. However, the time for the RMB to be a safe-haven currency is yet to come, at least not until the complete convertibility of its capital account is guaranteed.