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September 19, 2010 7:13 pm
Malaysia’s central bank has bought renminbi-denominated bonds for its reserves, marking a significant advance for Beijing’s attempts to internationalise the use of its currency, pitched by Chinese policymakers as a long-term rival to the US dollar.
The central bank’s move is also expected to herald further diversification into Chinese government securities by other Asian countries. “This brings the renminbi’s credibility to a whole new level,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole.
“It will have a domino effect, starting among China’s trading partners in Asia. Then it will gradually spread globally.”
The Malaysian central bank refused to comment on the move, saying that it never discusses the composition of its reserves, which amounted to M$311bn (US$100bn) at the end of August, which was then equivalent to US$95bn.
However, people with knowledge of the transaction said it had taken place recently and was thought to have been accompanied or followed by purchases by other Asian central banks, although none of these has yet been identified.
In August, China opened its domestic interbank bond market to foreign central banks that have access to renminbi through a series of bilateral currency swaps totalling Rmb800bn ($120bn).
The agreements, signed since 2008, are with Argentina, Belarus, Hong Kong, Iceland, Indonesia, Malaysia, Singapore and South Korea, although there are no details about how many of these swap lines have actually been activated. Commercial banks such as HSBC and Citigroup that have accumulated renminbi through cross-border trade settlement were also told last month they would be able to invest in China’s interbank bond market, although none has yet been given formal approval.
The decision to allow some central banks to invest in the domestic bond market is part of a push by Beijing to increase the international use of the Chinese currency. An expanded role for the renminbi would be a threat to the position of the US dollar, although many economists believe it will be years before it becomes a major reserve currency, given China’s tight financial market controls.
In the short term, the news may even be welcomed in Washington. If other countries are starting to buy Chinese bonds as reserve assets, it may put upward pressure on the renminbi by increasing the two-way flows with the currency.
Indeed it actually increases the possibility that, as some have suggested, the US could retaliate for Beijing’s purchases of US Treasuries by buying Chinese assets. According to an official at an international agency close to the Chinese and other Asian central banks, the Malaysia bond purchase is “a breakthrough”. But he added: “It’s still a baby step. China’s intention is not to upset the international monetary system; it’s to incrementally increase the role of the renminbi.”
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