Yuan gains while dollar shrinks in Bangladesh reserve

With China emerging as a major economic power, being the second largest economy after the United States, it has become a country of tremendous influence in the global economy and financial markets.

In the last decade, it has contributed more than 30% to global economic growth, according to reports.

The central banks around the world are increasing yuan holdings in their reserves as China, while its economic might grows, wants its money to replace the US dollar as global currency and the Bangladesh Bank is following suit.

The Bangladesh Bank has been building up the share of yuan in its foreign exchange reserve, cutting down the share of dollar as the Chinese currency is gaining acceptance faster in global markets for international payments as an alternative to the greenback.

The share of yuan in Bangladesh's foreign exchange reserve increased to 1.32% in August this year from 1% in 2017 when the dominating US dollar reserve fell significantly to 75% from 81% during the period, according to Bangladesh Bank data.

Other reserve currencies have also seen a surge.

For instance, the euro is the second highest reserve currency and the share of euro holdings increased to 5% in August this year from 3.84% in 2017 while the share of the pound increased to 4.4% from 3.43%, according to central bank data.

The share of yuan has been growing steadily in the country's foreign exchange reserve after the Chinese currency was included in the Special Drawing Rights (SDR) currency basket of the International Monetary Fund (IMF) in 2016.

The Bangladesh Bank declared yuan as approved currency for reserve holding some time after and started to build up the share of Chinese currency in the reserve, aiming to facilitate foreign investors amid rising business engagement with China.

As of August 2022, $528 million retained as yuan remained invested in the Chinese financial market. The figure was $323 million in January 2017, according to the Bangladesh Bank.

Meanwhile, China has offered currency swap agreement between the Bangladesh Bank and the People's Bank of China, its central bank, for using both renminbi and taka as currencies of pricing and settlement in bilateral trade.

In a letter sent on 19 August this year, the Embassy of China in Dhaka said a currency swap agreement will help to mitigate foreign exchange rate risk and reduce the cost of foreign exchange transactions.

When contacted, a senior executive of the Bangladesh Bank said they are working positively on this issue.

As Chinese currency is now internationally convertible and Bangladesh is holding yuan in reserve, it will be easier to go for currency swap, he said.

China is the top trading partner of Bangladesh in terms of import.

The total import from China was Tk1 lakh crore in FY21 and exports from Bangladesh to the country was Tk4,804 crore.

The IMF included the yuan in its SDR basket as a fifth currency, along with the US dollar, the euro, the Japanese yen and the British pound. The inclusion in the SDR basket means yuan is now an internationally convertible currency.

At present, Chinese yuan ranks third in terms of weight in the SDR basket, after the US dollar and the euro.

The SDR, short for Special Drawing Rights, is an international reserve asset supplementing members' official reserves, which can be exchanged among governments for freely usable currencies in times of need.

After inclusion of the yuan in the SDR, China strengthened its effort to promote the internationalisation of the yuan and the opening up of its financial market to attract foreign investors to invest in the Chinese market.

As part of promoting its currency, China has largely moved away from giving loans in dollars to the yuan when it comes to financial assistance to Bangladesh.

Its loan commitment in yuan has more than doubled in four years from FY17 to FY20 while disbursement in yuan has increased by more than seven times.

China emerged as one of the biggest sources of funds entering into the top development partner list of Bangladesh at the time.

The share of China in total foreign aid increased to 11.2% in FY21, securing the sixth highest bilateral development partner position of Bangladesh, a tremendous growth considering that funding from China was zero after independence.

China's commitment in yuan more than quadrupled in 2016-17 from the previous year, mainly riding on three projects – construction of a tunnel under the River Karnaphuli, Dasherkandi sewage treatment plan, and procurement of six vessels.

In 2018-19, China disbursed all of its assistance in yuan, completely bypassing the dollar.

Direct investment by Chinese firms in related projects was worth $15 billion last year, a quarter of which was in yuan. China now settles 15% of its foreign trade in the currency, up from 11% in 2015.

How yuan is emerging as global reserve currency

Some 85% of central banks say they have invested, or are mulling investing, in yuan, up from 81% a year ago, according to the UBS Asset Management's annual reserve manager survey released in July this year.

UBS Asset Management (Americas), Inc is a full-service asset manager providing investment and sub-advisory services to individual investors, financial advisors and institutions in the US.

Foreign exchange managers at central banks on average expect to hold 5.8% of their reserves in yuan in the 10-year time, up from 5.7% last year. That would be a significant increase from the 2.9% level reported by the IMF.

As of June 2022, central banks' share of US dollar holdings stood at 63% on average, according to the survey, down from 69% in the previous year.

But, the UBS said fewer Latin American banks, which typically hold more dollars, were surveyed this year, according to media reports.

More than 81% of respondents to the UBS survey said yuan will benefit from a shift to a "multipolar" world. Some 46% said the dollar will benefit, in a sign of the asset's appeal during times of economic or geopolitical tension.