ECB Said to Weigh First Step to Buying Yuan for Reserves

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Former Bundesbank President Axel Weber
Speaking in Washington yesterday, former Bundesbank President Axel Weber predicted a greater international role for the yuan. Photographer: Andrew Harrer/Bloomberg

The European Central Bank will discuss next week whether to begin laying the groundwork to add the Chinese yuan to its foreign-currency reserves, according to two people with knowledge of the matter.

Governing Council members gathering in Frankfurt for their Oct. 15 mid-month meeting will consider the move, said the people, who asked not to be named because the discussions aren’t public. Should officials eventually decide to buy the currency, initial purchases would be small and might start in a year at the earliest, one of them said.

Such a measure by the ECB would mark a major step in the internationalization of China’s currency, also known as the renminbi. While China is the world’s second-largest national economy, the yuan isn’t ranked among the most-held foreign reserve assets, according to data from the International Monetary Fund. The U.S. dollar leads at 61 percent of holdings.

The agenda of the Governing Council is confidential, an ECB spokesman said, declining to comment further on the matter.

Speaking in Washington yesterday, former Bundesbank President Axel Weber predicted a greater international role for the yuan.

“The emergence of the renminbi will be a big factor,” he said. “You will have an appreciation of the renminbi.”

The ECB’s push comes against a backdrop of global central bank diplomacy to ease the way for China’s currency, after a series of swap agreements on emergency liquidity.

Basket Review

Officials will review the IMF’s basket of so-called Special Drawing Rights, which doesn’t currently include the yuan, by 2015, according to the fund’s website. China hopes its currency can join, Li Bo, head of the People’s Bank of China’s second monetary policy department, said in Hong Kong in March. The basket currently includes the dollar, euro, pound and yen.

“It’s inevitable that the yuan will gain more and more market share in the global economy, especially as the euro loses strength in the market on fundamentals,” said Jorge Mariscal, emerging markets chief investment officer for UBS Wealth Management. “Over time it’s going to become the third reserve currency in the world” after the dollar and euro, he said.

The U.K. said Oct. 9 it has picked banks to sell its first yuan-denominated bonds as it seeks to develop Europe’s offshore trading center for the currency. The proceeds will be used to finance Britain’s reserves. In March, Germany’s Bundesbank and the PBOC agreed to cooperate in payment clearing and settlement in renminbi.

“Due to the size of China’s economy and its importance in global trade and, potentially, finance, the renminbi might ultimately come to challenge the U.S. dollar,” ECB Executive Board member Yves Mersch said in a speech in February. “The authorities and investors need to prepare for a world in which the renminbi will play a much more important role.”

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