Beijing: China is moving to add more emerging-market currencies to its foreign-exchange reserves, a strategy central banks around the world are following to diversify their $8.7 trillion (Dh31.93 trillion) in holdings.
"We can diversify more the foreign reserves, to consider not only smaller countries, but some emerging-market economies," central bank Governor Zhou Xiaochuan said at an event during a meeting of the International Monetary Fund in Washington Sunday. With increased assets, "you can shift some to riskier, but higher-return investment instruments," said Zhou.
China almost tripled its holdings of South Korean government bonds to 5.15 trillion won ($4.6 billion) in the first nine months of this year, according to South Korea's Financial Supervisory Service. Per-uvian central bank President Julio Velarde said in an interview in August he is "surprised" to see several monetary authorities buying government bonds denominated in the sol.
The desire among policy makers to diversify into developing nations' currencies comes as the US economy is hobbled by job losses and Europe faces widening budget deficits.
The IMF forecast this month that developing nations will expand 6.4 per cent next year, outstripping growth of 2.2 per cent among advanced economies.
Natural evolution
"The Chinese authorities are some of the smartest in the world," Kenneth Akintewe, a Singapore-based investment manager at Aberdeen Asset Management that oversees $261 billion globally, said in an interview on October 11.
"If you look at the fundamentals of a lot of these emerging markets, they are considerably better than developed markets. Who wants to be holding US dollars at this stage?"
Emerging-market currencies have rallied in the past month, with India's rupee gaining 4.7 per cent, Brazil's real 3.3 per cent, China's yuan 1.7 per cent, South Korea's won 4.2 per cent and Mexico's peso 4.8 per cent.
The move may add more "volatility" to emerging-market currencies as developing nations from Brazil to South Korea attempt to slow capital inflows and stem their currency appreciation, according to Arminio Fraga, Brazil's former central bank president.
"It seems to be a natural evolution," Fraga, now chairman of BM&F Bovespa SA in Sao Paulo, which owns Brazil's securities exchange, said in an interview. "There has been an increase in the importance and quality of investment opportunities in emerging countries and I believe the central banks see that too."
China's international reserves, the world's largest, increased 15 per cent over the past year to almost $2.5 trillion as of June as the central bank bought the dollar to keep the yuan from appreciating.
China is the biggest holder of US Treasuries, with $846.7 billion in Aug-ust. It started a sovereign wealth fund, China Investment Corp, in September 2007 to help diversify the reserves to generate better returns.
Mexico is seeing "very active" interest from Chinese investors in the country's local-currency government bonds, Octavio Lara, deputy general director of debt issuance at Mexico's Ministry of Finance, said September 15.
In the 1990s, developing nations were beset by currency crises. Mexico devalued its currency in 1994, sending the peso down 55 per cent in a year. During the Asian financial crisis in 1997 and 1998, South Koreans lined up to donate jewelry to help the central bank build dollar reserves and stem a flight of capital.
Leading gainers
Now, emerging-market currencies are leading gainers after developing nations cut foreign debt to 26 per cent of gross domestic product last year from 41 per cent in 1999, IMF data show.
The Brazilian real appreciated 61 per cent since January 2001, Colombia's peso climbed 31 per cent and Thailand's baht rose 30 per cent. Those gains compare with an advance of 3.5 per cent in the euro.
Global foreign reserves have more doubled from $4 trillion at the end of 2005, according to data compiled by Bloomberg and the IMF. Developing nations held $5.5 trillion as of June.
Diversification is in line with the "multi-polar" development of the global economy, said China's Zhou. As foreign reserves grow, "you don't need to keep a large" share in "very liquid assets," he said.
Currencies other than the dollar, the euro, the pound, the yen and the Swiss franc jumped to 3.8 per cent of global foreign reserves as of June, the most since the IMF started to compile such data in 1999.
The dollar's share has declined to 62 per cent in June, from 73 per cent in 2001, according to data compiled by the IMF.
The share of euro, the world's second-largest reserve currency, fell to 26.5 per cent in June this year, from a record 28 per cent in September 2009, as Greece received a $110 billion euro ($153 billion) bailout to finance its budget deficit that is equivalent to almost 14 per cent the size of its economy.