Goldman Sachs: Reserve Allocations To The Yuan Potentially On The Rise

Goldman Sachs note that "the OMFIF (Official Monetary and Financial Institutions Forum) published their annual Global Public Investor Report, which includes a recent survey of central bank reserve managers, sovereign funds, and public pension funds on their plans for reserve allocation. The results showed that 30% of respondents plan to increase their CNY holdings over the next 1-2 years, versus only 10% of respondents in 2020. It also noted that 68% of surveyed reserve managers "plan to increase their CNY holdings over a longer-term horizon," especially reserve managers located in Africa. In contrast, the report also found that 20% and 16% of central banks plan to reduce holdings of USD and EUR, respectively. We have argued that the main incentive for central banks to hold CNY in their reserve portfolios is higher returns relative to the more widely-held reserve currencies, namely USD and EUR. Our recent work has found that the return on a portfolio of CNY bonds usually exceeds other traditional reserve assets, in addition to offering diversification benefits, due to CNY assets' higher yields and lower beta to core markets. Due to the potential for higher returns, as well as changes in trade linkages and reserve growth itself, we expect the share of CNY in global reserves to roughly double over the next five years, implying about $350-450bn of inflows."