Institutional investors are confident that China’s Yuan is on the cusp of attaining reserve currency status in multiple countries worldwide, marking a significant shift on the global economic stage, according to a comprehensive research study conducted by Tresor Gold, a junior mining company headquartered in New York City, focusing on exploration and development projects in West Africa.
The international study, encompassing pension funds, private equity, venture capital professionals, family offices, and sovereign wealth funds, reveals that an overwhelming 93% of investors believe that China will successfully achieve reserve currency status for the Yuan within the next five years, with nearly one-third (30%) expecting it to be highly successful. Merely 2% anticipate the Yuan’s decline as a reserve currency.
Could this trigger a depreciation in the rise of the USD?
A potential rise in the Yuan’s prominence as a reserve currency could trigger a depreciation in the value of the US dollar, leading to an increase in the price of gold. The dynamics at play suggest that all else being equal, a depreciating dollar may trigger a flight to quality, as investors reduce allocations to US dollar-denominated investments such as US stocks and bonds, and increase allocations to physical assets, like Gold.
The Yuan’s adoption as a reserve currency finds strong support in China’s robust economic prowess and significant international trade flows, leading investors to believe that the country will persuasively convince central bankers worldwide to acknowledge the Yuan’s growing role.
IMF data currently places the Yuan as the fifth-largest currency by proportion held in global foreign exchange reserves. However, its share of 2.39% pales in comparison to the dominant position of the US dollar at 54.66%, along with the Euro, Sterling, and Japanese yen, all of which hold larger proportions.
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Strategic alliances are key for China
The research conducted by Tresor Gold, encompassing perspectives from Canada, Australia, the US, UK, UAE, France, Germany, Switzerland, Qatar, and Saudi Arabia, underscores the influential role of China’s strategic alliances. These partnerships, notably with BRICS bloc nations such as Brazil, Russia, India, and South Africa, emerge as linchpins propelling the Yuan’s progressive ascent as a reserve currency.
Notably, the combined economic prowess of these countries contributes a substantial 31.5% to the global GDP, surpassing the cumulative output of G7 nations at 30.7%. Within this paradigm, a resounding 25% of respondents strongly agree that these economic unions will firmly establish the Yuan’s status as a reserve currency, while an additional 72% moderately align with this prevailing sentiment.
BRICS summit spells out opportunity for the Yuan
At the BRICS summit in Johannesburg, China’s premier Xi Jinping said he wanted to see more countries joining the BRICS family. The use of the Yuan as a reserve currency could be a key platform in this expansion. Our own discussions with investors and feedback received from fund managers is that the so-called weaponisation of the US as a sanctions tool against Russia in 2022 has spooked many governments and central bankers. It has presaged a climate where investors and companies are seeking a more diversified environment within the forex world.
We are also seeing a sharp decline of dollar funding within China itself. Symptomatic of this was the move by Chinese hedge fund Hillhouse Capital to roll out a renminbi fund that will back ventures in the local healthcare market. It has a target raise of more than RMB 1.4bn. This also comes as foreign investors are radically cutting back their exposure in the Chinese market.
While IMF data shows the Yuan ranks as the fifth-largest currency in global foreign exchange reserves, it still has a considerable gap to close compared to the US dollar and even the Euro. However, with Algeria, Argentina, Bahrain, Egypt, Indonesia, Iran, Saudi Arabia, and the United Arab Emirates applying for BRICS membership, and other nations formally expressing interest, it’s clear that demand for the Yuan as a reserve currency is set to increase.
