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Renminbi gains ground as reserve currency – Industry roundup: 7 July

Central banks warming to China’s renminbi

Central banks are increasingly keen to hold China’s renminbi (RMB) as a reserve currency, as the country’s growing economic and political power challenges the US dollar’s global dominance, according to UBS Asset Management’s annual reserve manager survey.

The just-released 2022 survey reveals that 85% of central banks said they are invested, or are considering investing in RMB, against 81% a year ago.

Foreign exchange managers at central banks on average look to hold 5.8% of their reserves in RMB in 10 years’ time, up from 5.7% last year and also much higher than the level of 2.9% recently reported by the International Monetary Fund (IMF). Foreign exchange reserves are used to protect domestic currencies and to deploy at times of crisis.

The freezing of Russia’s foreign exchange reserves by many Western countries since February in response to the invasion of Ukraine has driven speculation that countries will diversify away from the US dollar, so they are less exposed to America’s influence on the global financial system.

The invasion, Beijing's close relationship with Moscow and China’s strong economic growth in recent years have encouraged talk of a “multipolar” world, in which the US is no longer the dominant force. The topic has regularly featured at summits held by the so-called BRICS economies of Brazil, Russia, India, China and South Africa.

UBS surveyed 30 top central banks between April and June and found that central banks’ average share of US dollar holdings was 63% as of June 2022, down from 69% last year. However, UBS said fewer Latin American banks, which typically hold more dollars, were surveyed this year.

More than 81% of respondents to the UBS survey said the renminbi would benefit from a shift to a “multipolar” world, while 46% said the dollar would benefit, in a sign of the asset’s appeal during times of economic or geopolitical tension.

“The renminbi continues its steady rise to reserve currency status,” UBS’ analysts said in the report, although despite the increased interest the currency is still some way from challenging the dollar for the top spot in global reserves.

Some analysts warn that Beijing’s autocratic leadership makes holding any Chinese assets risky, while doubts have grown about the economy over the past year as China’s property sector has wobbled and President Xi Jinping's zero-Covid policy has hampered growth.

Investors have flocked to the dollar in recent months as the Federal Reserve has hiked interest rates, pushing up US bond yields. The dollar index has risen almost 10% this year to around 105, close to its highest level in 20 years.

NPCI plans SWIFT alternative for 32 million Indian expats

NPCI International Payments, the company that built India’s digital payments backbone, says that it plans to make it cheaper and easier for 32 million Indian expatriates to bring their money back home, according to a Bloomberg report.

It says that Indians overseas remitted US$87 billion last year, the biggest inflow for any country tracked by the World Bank.

Ritesh Shukla, NPCI’s chief executive officer (CEO) said it is the ideal time to disrupt the remittances market, where it costs US$13 on average to send US$200 across borders.

“We have displaced cash in India to a large extent and are now looking to repeat the success in cross-border corridors,” said Shukla. “Overseas Indians can use our rails to remit money inwards straightway into their bank accounts, and for the markets where Indians travel frequently, we will build acceptance for our instruments.”

NPCI’s successful overseas forays would give India a home-grown alternative to the Belgium-based cross-border payment system operator SWIFT, although Shukla indicated that NPCI’s objective was not to displace existing platforms.

Around 330 banks and 25 apps, including Google Pay and WhatsApp, share NPCI’s unified payment interface in India. The company is in the process of connecting the UPI platform to systems in other countries to replicate its domestic success and is negotiating collaborations with various governments, fintech firms and service providers, aiming to reduce transaction costs and enable more small-ticket transactions.

Mayank Goyal, CEO of moneyHop, commented: “This is going to take the payments world by storm.” moneyHop, a cross-border banking app that lets users make international remittances through the SWIFT network, said the company will seek to integrate UPI rails into the app as it makes cross-border payments easier.

The Reserve Bank of India (RBI) in a report said UPI’s linkage with overseas will further anchor trade, travel, and remittance flows between the countries and lower the cost of cross-border remittances.

The RBI set up NPCI along with the country’s lenders to make retail payments faster, more accessible, and cost-efficient. A user just needs a virtual payment address to instantly transact with vendors and exchange cash between friends or family members.

Bank of England warns on commodities

The Bank of England has warned of a “significant risk” of further spikes in the price of raw materials and called for greater transparency in global commodity markets.

The BoE said that the price volatility of recent months in energy, metals and other commodities exposed “a number of vulnerabilities” in the market, as well as its linkages to the broader financial system. They posed a risk to financial stability and the situation had been exacerbated by the “particularly opaque” nature of some areas of the commodities market, which mean that authorities and players lacked a clear view of overall trading positions.

“Due to opacity, lack of data and the global nature of commodity markets, quantifying the size and scale of these vulnerabilities and interconnections remains challenging, and addressing this globally should be a priority,” the Bank said. “The heightened level of uncertainty following the Russian invasion and how the macroeconomic shock related to it will progress means there is a significant risk of further disruption in commodity markets.”

In its latest financial stability report the BoE noted a “complex range of interlinkages” between the financial world and the commodity industry. It said the gross exposure of UK banks to commodities amounted to £140 billion (US$167bn). They include the derivatives used by producers of raw materials to hedge their exposure to price movements and that traders rely on to speculate on prices. These instruments have been in the spotlight as spiralling commodity prices have led to more margin calls to put up more cash as collateral to back up positions and cover potential losses.

Some commodity producers have used credit from banks to help them deal with margin calls, although lenders have been less keen to help riskier clients, the Bank said.“If disruption is prolonged and uncertainty increases, banks may become even less willing to extend credit to commodity market participants.”

Next phase of TARGET2-Securities platform completed

The European Central Bank has confirmed that the new release (R6.0) of the TARGET2-Securities (T2S) platform was successfully deployed last weekend on 2 July, which also marked a key milestone in the T2/T2S consolidation project.

The ECB said that the new software release of the T2S platform incorporates a number of components into T2S that are shared across all TARGET Services, such as the single communication interface (the Eurosystem Single Market Infrastructure Gateway – ESMIG) and the Common Reference Data Management (CRDM) component. This is the first step in the technical and functional consolidation of the real-time gross settlement (RTGS) system and the securities settlement platform.

The final step in the consolidation project is the replacement of the current TARGET2 with a new RTGS system (T2) in November 2022. The T2 system will use the messaging standard ISO 20022 and facilitate payments in several currencies, which is already the case for T2S. In addition, the T2/T2S consolidation project includes the Central Liquidity Management (CLM) tool, which will allow participants to steer, manage and monitor central bank liquidity across all TARGET Services.

Two weeks ago the ECB said that together with the Banco de España, Banca d’Italia, Banque de France and Deutsche Bundesbank, as T2S operators, it continued to stand ready to support stakeholders in their preparations for the go-live of the new release. The release date of 2 July 2022 was set back in March after a three-week postponement was deemed as necessary by the Market Infrastructure Board (MIB) – which manages the day-to-day running of T2S and the other TARGET Services – and the market.

Germany’s Enercon wins €500m state ‘liquidity assistance’

German turbine manufacturer Enercon is to receive €500 million from Germany’s state Economic Stabilisation Fund (ESF) to help “cushion the impact of negative consequences from the Covid-19 pandemic”.

The German government set up the ESF in March 2020, during the first wave of coronavirus cases to counteract the pandemic’s impact on the economy. Using guarantees and capital aid. It provides companies across different sectors with stabilising measures to strengthen their capital base, overcome liquidity shortfalls and protect jobs. The fund originally had a total volume of € 600 billion.

Enercon said that the interdepartmental Economic Stabilisation Fund Committee has approved the state liquidity assistance, which is intended to stabilise the company’s supply chain. It added that it is currently undergoing a transformation “with clear prospects for continuation with high asset value and an excellent equity capital base”.

The company is working on a solid financial basis and aims to end 2022 with a break-even result. “However, the Covid-19 pandemic has caused significant disruptions to the global supply chains, unexpected extra costs (materials, components, transport and logistics) and has ultimately resulted in delays to important projects,” Enercon added.

The company said the situation has not yet returned to normal and the “rising infection rate in China once more means a further increase in coronavirus-related supply chain risks can be expected.

“Up until now, Enercon has been able to absorb the challenges by itself. However, this has taken a huge effort and considerable reserves. In order to minimise liquidity risks, Management has decided to make use of a state credit line from the ESF.”

The announcement comes one week after Enercon completed a €118 million senior facilities agreement for bridge financing to be used to construct a 134 megawatt (MW) wind farm in Sweden. The financing agreement, with DNB Bank, who acted as the sole mandated lead arranger, is for the construction of the Ersträsk North wind farm in the Markbygden area.

Denmark’s central bank blows cold on need for CBDC

With some countries having already launched a central bank digital currency and many others at various stages of development, Denmark’s National Bank has questioned the motivation for CBDCs among developed nations. The central bank also stated that while it is open to new forms of digital money – and plans to hold a conference on the issue later this year – Denmark’s financial system has no pressing need for them.

The National Bank outlined its views in an analysis paper titled ‘New types of digital money’, which discusses digital assets, including stablecoins, wholesale CBDCs, and retail CBDCs. 

The paper argues that the key motivation for central banks exploring them, especially in the European Union, is for retail CBDCs to act as a trust anchor for digital money once cash disappears. This motivation is absent in Denmark as the country is already a leader in adopting digital money.

Only around 10% of physical transactions in Denmark now involve cash, yet the system has adapted well with reliance on digital bank money and not a CBDC. Similarly, the National Bank also cites its finding that Danes who store money in cash do so for anonymity and not for any systemic trust concerns for digital money. 

“At present, and with the associated costs and possible risks, it is not clear how retail CBDCs will create significant added value relative to the existing solutions in Denmark,” the report said. 

Nonetheless, the report states that Denmark does not completely rule out the prospect of a CBDC in the future and is still committing resources to study it. It goes on to outline several arguments in favour of CBDCs, including that they can increase financial inclusion, improve financial system resilience, and reduce reliance on foreign payments infrastructure. 

Denmark began exploring the launch of a CBDC, or e-kroner, in 2016 but an analysis published by the National Bank in December 2017 was also unenthusiastic and concluded: “It is difficult to see what central bank digital currency would be able to contribute that is not already covered by the payment solutions which exist today. Denmark has a secure and effective payments infrastructure and digital currency, in the form of bank deposits, already exists.”

The country has subsequently only explored other use cases for blockchain technology. In 2020 the Danish Ministry of Development Cooperation released report on how blockchain technology can be used to fight corruption.

Revolut partners with Stripe for payments in Europe

Banking app Revolut is partnering with financial infrastructure platform Stripe to accelerate its global expansion plans.

The fintech will add Stripe infrastructure to its UK and Europe payments offerings before rolling it out to Brazil, Mexico and other new markets. It said that with the help of Stripe, Revolut will offer its customers a “seamless payment experience” that matches their local payment preferences.

“Revolut and Stripe share an ambition to upgrade financial services globally,” said Stripe EMEA and growth lead Eileen O’Mara. “We’re thrilled to be powering Revolut as it builds, scales, and helps people around the world get more from their money.”

The partners said that they also look into more opportunities to further collaborate and deliver new payments products down the line.

The collaboration follows other recent initiatives by Revolut to develop its business. It has launched in stores for the first time with physical card readers, entered the ‘buy now, pay later’ (BNPL) market and last month partnered with open banking platform Tink.

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