Nagel Says Yuan Has Potential to Become Global Reserve Currency

Bundesbank board member Joachim Nagel said the Chinese yuan may become an international reserve currency and that Frankfurt is trying to establish itself as the trading center in Europe.

“Although international use of renminbi does not reflect China’s economic prowess at present, with its increasing convertibility, the currency has the potential to become one of the future global reserve currencies,” Nagel said at a conference in Frankfurt yesterday, referring to another term for the yuan. “Given China’s growing economic importance, the internationalization of the renminbi seems long overdue.”

China’s currency has increased its prominence, a report by the European Central Bank showed July 2. Between 2010 and the end of 2012, the share of the nation’s trade in goods settled in yuan increased to nearly 10 percent from almost zero. Still, less than 1 percent of all transactions worldwide are currently settled in yuan, Nagel said.

China has promoted its currency internationally since 2009 and last month signed a three-year swap agreement for 200 billion yuan ($32.6 billion) with the Bank of England to foster trading in London. The European Central Bank, based in Germany’s financial capital, may obtain a deal valued at four times that amount, according to lobby group Frankfurt Main Finance. Almost 80 percent of offshore yuan trading is currently settled in Hong Kong.

Offshore Market

“The unique separation of the onshore and offshore currency market, in particular, will facilitate the transition from a currency purely intended for trade to an investment, and potentially, a reserve currency,” Nagel said. “Because of the capital controls still in place, the renminbi is currently in transition from being a pure trading currency to being an investment currency. While both inward and outward direct investment is now possible, portfolio investments will continue to be regulated.”

Nagel said the Bundesbank welcomes Chinese initiatives toward the free movement of capital. The country is Germany’s third-biggest trading partner.

“The high level of interaction between China’s and Germany’s real economies highlights the necessity for a more active renminbi trade, perhaps even using Germany as a hub,” he said.

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