The RMB and Foreign Exchange Reserve Trends.

In Commentary on April 18, 2011 by CQCA

The chart above shows the composition, by percentage, of foreign exchange reserves held in 2000 and 2009. The U.S. Dollar accounted for 71% of world (reported) foreign exchange reserves at the beginning of the decade, but was down to 62% at the end. The Euro increased from 18% to 27%. Other currencies increased from 1.50% to 3.00%.

The Renminbi was most likely a significant contribution to the other category. The People’s Bank of China during this time slowly allowed the Renminbi to leave China, but closely managed the amount. In December, 2010, the People’s Bank of China announced they were increasing the number of companies that can trade in Renminbi from 365 to 67,395. According to the Bank of China, official cross-border transactions increased from zero before July, 2009 to 510 billion RMB at the end of 2010.

Most of these currency flows are going into international banking centers, such as Hong Kong, Singapore, and Switzerland, according to HSBC Global Research. The Chinese government’s policy of pegging the RMB to the U.S. Dollar, regardless of monetary policy, will now most likely be replaced by a banking system that will at some point realize the Renminbi is far more inflated that the other major currencies.

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