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Coronavirus boost to the US dollar shows China must do more to win global trust in the renminbi

  • To change investor psychology towards the renminbi, Beijing must not only improve monetary policy transparency and open financial markets, but also support international bodies like the IMF and World Bank

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A woman holds up US dollar and renminbi banknotes in Qionghai, in south China’s Hainan province, in 2016. The coronavirus crisis has seen investor flight to the US dollar and downward pressure on the renminbi. Photo: Xinhua

If you have ever wondered why some currencies go up and others go down in times of strife, it is not just a simple matter of risk preference. There is plenty for investors to consider. One major ironclad law, though, is that when dangers threaten, investors bail out of “riskier” currencies and pile into safe haven bolt-holes.

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Generally the “safer” currencies, like the US dollar, the Swiss franc and the Japanese yen, are on the receiving end of these flight-to-quality flows, while higher-yielding, more volatile currencies suffer as investors hit the panic button.

The coronavirus crisis has been no exception, with investors diving for cover into the dollar and China’s renminbi coming under pressure once again. It is a perception that Beijing has to change to stand any chance of turning the renminbi into a “must-have” currency in times of stress.
Progress has been slow since the renminbi first gained reserve currency status in October 2016, with the currency still only accounting for about 2 per cent of allocated foreign exchange reserves held by the world’s central banks, according to the International Monetary Fund.

Meanwhile, the dollar continues to dominate as the world’s most favoured reserve currency with about 60 per cent of global holdings at the end of 2019. That is well above the euro’s 20 per cent market share and allocations of around 5 per cent for the yen and British pound.

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