China's currency is set to take an increasing share of world foreign-exchange reserves, with the dollar and yen having to make the most room proportionally for the newcomer on the block, according to Goldman Sachs Group Inc.
An acceleration in foreign inflows into Chinese fixed income in recent months — despite a tumble in the yuan — has showcased the power of allocation demand for the world's No. 3 bond market. Central banks will probably account for $250 billion of an estimated $1 trillion of net inflows into Chinese bonds in the five years through 2022, Goldman analysts said.
"Reserve re-allocations (i.e., outflows) could be more concentrated in dollars and yen," analysts Danny Suwanapruti, Michael Cahill and Andrew Tilton wrote in a note Friday. Because central banks already hold the bulk of their reserves in dollars, the greenback is a natural funding source. "The rise in the renminbi's prominence should impact the yen more since it will no longer be Asia's only reserve currency," they wrote, using another term for the yuan.