Central banks will accelerate rise of the renminbi, as they add the Chinese currency to their reserve assets, according to the 2021 Global Public Investor (GPI) survey produced by the Official Monetary and Financial Institutions Forum (OMFIF).
The London-based think tank for central banking, economic policy and public investment, surveyed more than 100 GPIs – central bank reserve managers, sovereign funds and public pension funds – on their asset allocation strategies, investment approaches and market trends.
The report also showed the dramatic impact Covid-19 and the lower-for-longer rate outlook is having on a group of investors that have, across the industry, $42.7tn of assets under management. Trends in diversification – to boost or maintain returns, or to incorporate a more sustainable investment approach – are accelerating, the annual survey revealed.
The 2021 GPI also examines how central banks are embracing riskier assets, new currencies, and a more holistic understanding of asset ownership, drawing on a new dataset of over 100 sovereign investors.
“For example, around the time of the 2008 financial crisis, few central banks invested in corporate credit, and even fewer held equities,” the OMFIF study says. “But in 2021, a generic reserves portfolio looks very different.”
In the Covid-hit 2020, central banks held a higher level of foreign exchange reserves “than in the run-up to all previous financial crises”.
“The growing prominence of equities in central bank reserves portfolios is a neat corollary to the notion that many central banks are unwilling to use all their foreign exchange reserves during a shock,” the study says. “While the types of equities central banks generally invest in are highly liquid, they represent a more return-orientated, productive investment than fixed income products. Indeed, 27% of central banks surveyed said that they planned to add to their equity exposure over the coming two years, showing that diversification will continue.”
OMFIF chair, David Marsh, stated:
“… central banks have entered a domain where they can be accused of promoting fiscal dominance. Their actions can be regarded as principally geared to help governments manage their much-increased debt rather than safeguard monetary stability. GPIs and the governments and citizens behind them are thus caught in a matrix of intertwining risks,”
“The most obvious one, but by no means the most frightening, is that a persistent rise in inflation would force the Fed to start tightening credit much earlier than originally expected. This would cause acute dilemmas for monetary authorities around the world faced with a choice of allowing their currencies to depreciate or to raise interest rates with calamitous consequences for their governments’ debt management policies. That moment of reckoning is likely to come, sooner or later. It will preoccupy GPIs in the months ahead.”
With teams in London and the US, OMFIF focuses on global policy and investment themes relating to central banks, sovereign funds, pension funds, regulators and treasuries. Global Public Investors with investable assets of $39.5tn are at the heart of this network.