Europe’s central banks are starting to replace dollar reserves with the yuan
In short, China wants to become a bigger global power. One way its doing that is by knocking the U.S. dollar down a peg on the world stage.
A new report from Quartz below shows China’s currency, the yuan, is already beginning to steal some thunder from the dollar.
As you can see in the chart below, the yuan has a long way to go to challenge the dollar’s dominance. But this is a major story you should be watching. As more central banks turn in dollars for yuan, we should slowly see global economic power start to shift towards China.
While this isn’t great news for the dollar, it shouldn’t be alarming. But it IS great news for what Dr. Steve Sjuggerud recently called his “top investing idea for the next five years”: Chinese stocks.
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Late last year, China’s Xi Jinping said it was time for the nation to “take center stage in the world.” There are many ways for China to do this, including promoting globalization, boosting foreign aid, and developing advanced technologies. Another critical step in taking “center stage” is to be at the center of the global economy. To achieve this, China is, among other things, trying to internationalize its currency.
For the past 70 years, the US dollar has been the world’s dominant currency. Two-thirds of the world’s $6.9 trillion allocated foreign exchange reserves are held in US dollars. The yuan took a major step towards broader international adoption in 2016 when the IMF decided to include it in the basket of currencies that make up the Special Drawing Right, an alternative reserve asset to the dollar.
Still, as of the third quarter of 2017, just over 1% of foreign exchange reserves were held in yuan, according to the latest data from the IMF. Now, there are signs that this is about to increase.
The Chinese yuan hit a two-year high against the U.S. dollar this week, after the German Bundesbank said that it would include the yuan in its reserves for the first time. “The notable development from the European point of view over the past few years has been the growing international role of the renminbi in global financial markets,” Andreas Dombret, a member of the central bank’s executive board, reportedly said at a conference in Hong Kong (paywall). The decision was made last year and no investments have been made yet, as preparations are still in process. The French central bank then revealed that it already held some reserves in yuan.
As most central banks’ reserves are held in dollars, any shift into other currencies, such as the yuan, will come at the expense of the greenback.