Date
21 August 2018
Central bank governor Perng Fai-nan
Central bank governor Perng Fai-nan

Taiwan eyes bigger RMB reserves on yield prospects

Taiwan’s central bank, which has added the renminbi to its reserve portfolio, may consider more yuan-denominated assets if returns remain lucrative.

“Whether we will increase renminbi assets in our reserves depends on three factors. First and foremost, liquidity; second, safety and third, earnings,” a spokesperson told EJ Insight by phone from Taiwan.

“We see that the renminbi has been yielding considerable returns.”

Yields on benchmark 10-year US treasury notes are 2.62 percent while returns on China’s 10-year government bonds are 3.98 percent.

Central bank governor Perng Fai-nan said Wednesday that Taiwan added the Chinese currency to its US$409.4 billion reserves after similar moves by Asian economies amid Beijing’s push for renminbi globalization. It has been less than six months since Taiwan made the decision, the spokesperson said.

However, Taiwan will proceed cautiously with any decision to beef up its renminbi assets, said the spokesperson who also advises the central bank on foreign exchange policy.

Taiwan could allocate up to 2 percent of its reserves, or US$8.2 billion, in yuan assets onshore where supply is more abundant and trades more liquid than in the offshore market, analysts said. Over the longer term, the ratio could rise to 5 percent.

Foreign central banks are eligible players in China’s 26.6 trillion yuan (US$4.34 trillion) interbank bond market after obtaining quotas from their Chinese counterpart.

Attractive returns

Taiwan’s 1.65 percent 10-year sovereign yield is the lowest in the world after Japan’s 0.65 percent and Switzerland’s 0.98 percent. China apparently offers better returns on its 10-year bonds.

Also, the renminbi is the only appreciating Asian currency this year, with a 1.8 percent gain against the US dollar. That compares with a 1.4 percent fall in the Taiwanese dollar and an 11.1 percent slump in Japan’s yen, a reserve currency.

“Taiwan might be holding 1 to 2 percent of its reserves in yuan,” said Frances Cheung, senior fixed income strategist at Credit Agricole CIB. “It underlines the need for diversification as the currency becomes increasingly internationalized.”

Backing Beijing’s yuan campaign, more countries have been buying into yuan assets to rebalance their reserves from the greenback and the euro.

At the end of June, nearly 62 percent of the world’s US$6.07 trillion in allocated forex reserves were in US dollar, 23.8 percent in euro and 3.8 percent in Japanese yen, International Monetary Fund data shows.

Other significant allocations were in pound sterling, Swiss franc, Canadian dollar and Australian dollar while the remaining 2.8 percent were in other currencies including the renminbi. 

In April, Australia said it will invest about 5 percent of its foreign currency reserves in China. Japan and Nigeria also bought yuan assets. Other countries may have quietly built up their offshore dim sum bond assets.

Taiwan’s forex reserves, Asia’s third largest, rose by US$270 million in August from a month earlier. Domestic lenders had 85.14 billion yuan of renminbi deposits at end-August, central bank figures show.

– Contact the reporter at [email protected]

RA

EJ Insight reporter

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