Asia's Central Banks Want to Add Yuan to Foreign Reserves, Tetangco Says

Asia’s central banks want to diversify their growing foreign-exchange reserves into yuan- denominated debt issued by China’s government, according to Bangko Sentral ng Pilipinas Governor Amando Tetangco.

Tetangco, who met with People’s Bank of China as part of an economic road show, said Asian central banks have agreed to “look for new avenues for diversification,” according to an e- mailed statement from the Philippine Department of Finance. “Given, however, the traditional investment constraints of central banks, I suggest that the Chinese government may consider issuing more yuan-denominated bonds,” he was quoted as saying.

Premier Wen Jiabao is seeking to promote use of the yuan as an alternative to the dollar in global trade and investment, while avoiding a buildup of speculative capital. Cross-border transactions in the yuan totaled $58.7 billion in 2010, 13 times the amount a year earlier, Xinhua News Agency reported April 1, citing the State Administration of Foreign Exchange.

Tetangco’s “comments are ground-breaking as this is the first time that a regional central bank openly stated the intention of emerging Asia to diversify foreign-exchange reserves into yuan-denominated assets,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB. “This is a coup for China, which has been working hard to internationalize its currency.”
Weaker Dollar

The yuan slid 0.1 percent to 6.5448 per dollar as of 1 p.m. in Shanghai, extending yesterday’s retreat from a 17-year high of 6.5350 reached April 8, according to the China Foreign Exchange Trade System. It has strengthened 0.8 percent this year, while the Dollar Index, a gauge of the greenback’s strength, has dropped 4.9 percent and yesterday recorded its lowest close since December 2009.

Central banks in Hong Kong and Thailand have won approval to invest in China’s interbank bond market this year.

The Hong Kong Monetary Authority can invest up to 15 billion yuan, Chief Executive Norman Chan said Jan. 26. The Bank of Thailand can buy as much as 200 million yuan of debt denominated in China’s currency and will use its own assets rather than the nation’s foreign-exchange reserves to finance purchases, Chairman Chatumongol Sonakul said Feb. 24.

Malaysia, which imposed capital controls after the 1998 Asian Financial Crisis, will see increasing use of the yuan in trade with China, while keeping the dollar as its key reserve currency, Prime Minister Najib Razak said in an interview in March. The country eased regulations last August to allow exporters and imports to use the ringgit and other currencies to settle trade with foreign companies.

Bursa Malaysia Derivatives Bhd., which sets the global benchmark for crude palm oil, started accepting yuan as margin collateral for trading in November.