Time for a single reserve currency is over, warns Gulliver

Stuart Gulliver
Stuart Gulliver: renminbi headed for certain reserve status

The time for a single reserve currency is over and Chinese renminbi is set to become a reserve currency within 15 years, sharing that status with the US dollar and the euro, according to Stuart Gulliver, group chief executive of HSBC.

Speaking at the British American Business annual conference in London on June 28, Gulliver claimed a shift towards reserves held in the yuan will be part of a broader financial revolution that will include the further development of China's financial services industry.

"We are on the verge of an epic financial revolution. The world is hungry for an alternative to the US dollar and to the euro. Renminbi will not replace the US dollar, but it will share the position with the euro as well, if the European currency is able to get through the current crisis – as is our belief. The time of a single currency to be used as a world reserve is probably over," Gulliver said.

The comments, which are based on HSBC's research, encapsulate a widespread belief that renminbi will become a reserve currency and the development of offshore renmibi (CNH) represents an exciting opportunity in the foreign exchange markets. Global FX reserves are measured at $10 trillion, with the US dollar's share showing a declining trend, according to Gulliver.

"According to our data, reserves held in US dollars were 70% of the total 10 years ago, and are now 60%. The dollar and the euro account together for almost 90% of the overall world reserves. Sterling has increased slightly over the past decade, but the UK currency only accounts for 4% of global reserves," he said.

The dominance of the dollar and euro also emerges from FX trading volumes, with the two currencies accounting for 97% of the market, according to HSBC's data. While renminbi currently has no share of global reserves, due to the non-convertible status of the currency, HSBC expects that to change. The bank also expects a major shift towards emerging economies, with China and India expected to be the largest and third largest economies by 2050. That shift will lead US dollar reserves currently held by China to be invested domestically, said Gulliver.

But he warned the yuan's path towards reserve currency status would be slow and dependent on the liberalisation of the domestic currency market. "China will need to establish a safe market, to liberalise interest rates, to open up its capital accounts, and to develop a substantial liquidity base," he said.

A first step in that direction is the ongoing development of offshore renminbi in Hong Kong, which Gulliver said is already bigger than the Malaysian ringgit market. To satisfy the growing demand for the currency, the Hong Kong-based Treasury Markets Association launched a USD/CNH spot fixing earlier this week, with quotes provided by 15 banks.

Speakers at the conference also discussed other factors that might influence major currencies over the coming months, including the end of the second round of quantitative easing in the US, which could affect the US dollar, and the possibility of contagion from the Greek debt crisis.

"We are going through a period of acute crisis. The crisis in Greece will destabilise other European and eurozone economies, as well as the functioning of the economic and monetary union, with serious implications for the growth outlook beyond the European borders. It is our responsibility to avoid the worst-case scenario, and all our efforts today are on finding an orderly solution to the problem of Greek sovereign debt," said Joaquin Almunia, vice-president of the European Commission in Brussels.

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