Trends in reserve management: 2019 survey results

The survey questionnaire was sent to 130 central banks in February 2019. By the end of March, replies had been received from 80 reserve managers, responsible for a total of $6.9 trillion, or 53% of the world’s total, with gold valued at market prices as of August 2018. The average holding of respondents was $86 billion. Breakdowns of the respondents by geography and economic development can be found in the tables below.

Which in your view are the most significant risks facing reserve managers in 2019? (Please rank the following 1–5, with 1 being the most significant.)

A US/China trade war is the most significant risk facing reserve managers in 2019. Thirty-one reserve managers placed this first and nearly three-quarters of respondents said it was the most or second most significant risk. There is also significant concern over a US recession and Brexit: over 40% of respondents placed this either first or second. The risk of a US recession is clearly more pressing, however, with 29% of respondents seeing it as the most important. A fall in stock markets and sell-offs in China and emerging markets were a concern to only a minority – with 23% and 19% of respondents, respectively, seeing these as significant.

These findings were not uniform across country classifications, however. Among reserve managers from emerging-market countries, the largest group of respondents, there was more concern about a US recession, which 32% placed first, compared to a US/China trade war with 35%. Brexit was more of a concern, with 23% placing this first, with European central bankers figuring prominently in this group. For both developing and transition countries, concern over a US/China trade war dominated: in both groups, over half placed this first. The views of industrial country reserve managers were broadly in line with the overall sample, although none placed China and an emerging-market sell-off first. In contrast, this was the view of 12% of respondents from developing countries.

The group of 31 who placed a US/China trade war first was dominated by reserve managers from central banks in Europe. One of the 14 from this group, in this case from an industrial country, explained their thinking: “[The] main risk is around uncertainty – and of course political uncertainty around the US has been and will continue to play an important role for 2019 and into election year 2020.” A reserve manager from a transition country offered a nuanced view of where they saw the balance of risks, and how these could develop over the year:

Which in your view are the most significant risks facing reserve managers in 2019? (Please rank the following 1–5, with 1 being the most significant.)

A reserve manager from a developing country in Africa saw the repercussions of a trade war being felt in markets traditionally favoured by reserve managers: “We do think that if the trade war persists, it will affect the economic performance of many of the economies where reserve managers invest in, it will increase volatilities in financial markets and end up limiting the performance of investment in fixed income (in particular for emerging markets).”

Just under 30% of respondents placed the risk of a US recession first. These reserve managers were responsible for $1.6 billion, with central bankers from Asia featuring prominently. A reserve manager from the Asia–Pacific region was worried how this would impact interest rate policies in the US and asset prices: “The growing signs of US recession have an impact on the monetary policy to be adopted by the Fed and this has implications on the valuation of assets going forward.” A reserve manager from central Asia, who noted that most of their reserves were in US dollars, was focused on developments in the US: “Increasing probability of US recession and political uncertainties around the US, like a US/China trade war, might be major risk concerns.” A reserve manager from Africa placed the potential for the US to experience a downturn in a global context: “The risk of further global slowdown (aiding national negative GDP growth) and US recession are the most significant looming threat.”

A large reserve holder from the Americas was concerned that, with a downturn looming, the US might not have much room to manoeuvre as interest rates were already fairly low:

Brexit was cited by 12 reserve managers, responsible for just under $700 billion, as the most significant risk. European reserve managers made up just over half of this group, with a central banker from a transition country being unequivocal: “The biggest issue from a financial stability perspective, from a market integrity perspective, from a continuity perspective, is a no-deal scenario by the end of March.” An industrial country reserve manager was less emphatic, focusing on the impact on fixed-income markets: “Reserve managers are mainly risk-averse fixed-income investors, thus more sensitive to events that may affect that asset class.” A reserve manager from Central America saw Brexit, along with other factors, as driving volatility in the markets:

A reserve manager from an emerging market put it succinctly: “The most significant risk is a no-deal Brexit.”

Do you see geopolitical factors impacting currency allocation in the following?

Overwhelmingly, reserve managers see geopolitics as affecting the choice of currencies and the amounts invested in by central banks as a whole. This was the view of 80% of survey respondents. However, this view was not mirrored when it came to their own reserves: just over one-third of respondents said that these forces would impact their allocation directly.

The 61 reserve managers who saw geopolitics impacting currency allocation on a global scale were drawn from all regions and across economic groups. In their comments, many respondents noted straightforwardly they thought that this would be a factor for central banks. A comment from a reserve manager in Asia was typical: “Global central bank reserves may be impacted in their currency allocation according to the geopolitical factors.” For a reserve manager from the Americas, this would be the case for certain currencies and where exposure was high: “Higher risks in certain currencies could definitively cause change in allocations to those more exposed.” A European manager observed that, while their response was tactical, they believed some central banks were responding to geopolitics: “In our case, it does not affect the strategic asset allocation but tactical asset allocation is affected. I believe there definitely are central banks that are reacting more to these geopolitical risks.” A reserve manager from an industrial country made an interesting distinction between currency and asset allocation: “Geopolitical factors could bring changes in asset allocation (due to the reactivation of the search for yield push) but will not impact currency allocation to the same extent.”

The group of 26 reserve managers that said they did see geopolitics impacting currency allocation in their reserves was largely made up of European central bankers. Indeed, across Europe a narrow majority said they did not see an impact on currency allocation, in contrast to the overall two-thirds figure. A similar pattern was observed among African reserve managers. This group of 26 was responsible for $1.6 trillion in reserves, and in the main saw a US/China trade war as the most significant risk facing reserve managers: over half were of this view. In their comments, reserve managers either explained how their process incorporates geopolitical factors or gave specific examples of changes. For a reserve manager from an emerging market in Europe, geopolitics would be felt in general market observations: “Geopolitical factors like protectionism, euro-scepticism, Brexit, etc, could impact macroeconomic developments (globally or in particular regions) and translate into financial markets outlook.” A similar view was expressed by a reserve manager, also from Europe: “We consider geopolitical factors in the strategic asset allocation level in an implicit fashion, among other qualitative factors.” For an African reserve manager, the aim of preserving the value of the reserves would be the driver: “Capital preservation is a key objective in reserve management for central banks.”

In terms of whether geopolitics would directly impact markets, a reserve manager from Africa was concerned about contagion: “A worsening of the China/US trade relationship could fuel a sell-off in emerging-market currencies,” and in extended comments two large reserve holders explained changes they saw or had made. A reserve manager from the Americas noted:

A European reserve manager, in contrast, saw Asian currencies as benefiting:

To what extent do you agree that the US dollar is still the safe haven currency? (Please check one of the following.)

The dollar remains preeminent in reserve managers’ eyes as the safe haven currency. Almost all respondents agree with the premise, and just under half “strongly agree.” The 36 reserve managers who said they strongly agreed were responsible for $1.5 trillion in reserves. Just under half this group was from emerging-market economies, and indeed a majority of emerging-market country respondents selected this option. Central bankers from industrial countries also tended to prefer this option: nine of the 15 who responded said they strongly agreed that the dollar was still the safe haven currency. However, majorities of developing and transition countries said they agreed rather than strongly agreed with the premise. The 39 reserve managers who chose “agree” were responsible for $3 trillion in reserves, and included a number of large Asian holders. Of these 39 reserve managers, 12, responsible for just short of $1 trillion, said they could see geopolitical factors impacting their currency allocation in their answer to the previous question.

In their comments, respondents’ reasons could be grouped around four headings: liquidity (and final means of payment); the dollar’s dominant share of global reserves; the economic strength of the US; and, finally, how the dollar performs in times of market stress. A comment from an Asian reserve manager, who agreed it was still the safe haven, provided a useful summary of these views: “Strong existence of the US in global financial markets, higher proportion of worldwide reserves being in US dollars, and more faith in US economy compared to the rest of the world prove that the dollar is still the safe haven currency.”

In the Americas, liquidity was key for one reserve manager: “It’s still, by far, the most liquid currency and the most used in international payments.” A related factor was the central banking community’s continued faith in America’s currency: an African reserve manager noted that “The US dollar still accounts for a greater proportion of reserve portfolios,” a view echoed by a central banker in Asia: “Based on the IMF SDDS [International Monetary Fund’s Special data Dissemination Standard] data, USD still remains the dominant reserve currency that the global markets hold.” Economic weight and governance were singled out by a reserve manager from the Americas: “The US is the most important economy in the world. Its financial markets are very developed and liquid. Its institutional and legal framework is robust and solid.”

Two comments stressed how the dollar performs in times of heightened risk. For the first, from the Americas, this, added to market liquidity, was key:

For a European reserve manager, recent events had confirmed the status: “During the last episodes of geopolitical uncertainty, the US dollar has been the safe haven asset of choice by investors.” Interestingly, the one industrial country that disagreed that the dollar was the safe haven currency felt other currencies performed better: “Other currencies benefit more from risk-averse market movements.”

Three European reserve managers, while affirming the dollar’s status, qualified this view with concerns. A reserve manager from an industrial country thought the status was on the wane: “Difficult to replace under liquidity and convertibility aspects, but with slightly declining importance.” For an emerging-market reserve manager, it was more the case that they were less convinced by the alternatives: “The problem is that being the best does not necessarily mean good. In other words, among all options I still prefer [the] US dollar as being relatively the best payment mean across the world.” For another, the recent interest in gold among central banks was evidence that the status was not guaranteed:

The US Federal Reserve is expected to reduce the rate of policy normalisation in 2019. Have you made any changes to your dollar exposure in light of this?

The shift in language from the Federal Reserve at the start of 2019, widely interpreted as signalling a slower policy normalisation than had been expected, has not led reserve managers to change their exposure to the dollar. Almost 90% of survey respondents were of this view. The minority who said it had led them to change their exposure featured two larger holders from emerging markets, one very large holder from Asia and the remainder smaller reserve holders from developing and transition countries. One European reserve holder said they had hedged their exposure as they saw the dollar weakening against their numeraire. An Asian central banker explained the changes they had made: “We increased overall duration by extending outright duration than last year as well as by underweighting FRN [flexible-rate notes] and money market instruments and overweighting fixed bonds.”

The comments received from reserve managers who had not made any changes in response to this shift could be broadly divided into three groups: those who used a strategic asset allocation process that was not affected by this; those broadly comfortable with their position; and those who had made changes for other reasons. A European reserve manager, from an emerging-market country, was indicative of the first group:

A reserve manager from the Americas explained their stance, concluding on a positive note for US Treasuries:

For a reserve manager from Africa, their dollar weight was a function of external obligations that would not be affected by the change in Fed policy: “No change has been made to the US dollar exposure following policy normalisation in the US. The currency composition/weights of the portfolio reflects the currency structure of external obligations, and is a decision that is only informed through the SAA [strategic asset allocation] process.”

Several respondents commented that they were comfortable with their dollar exposure; as a reserve manager from the Americas explained: “We expect that the global monetary policy will continue showing divergence between US and the rest of the world, with a cycle of increasing rates in the US market, although at a slower pace than previously estimated.” A central banker from Africa was pleased with the performance: “We are happy with the current exposure to USD, as it allows us to have higher returns comparing to other G7 currencies, and using them as the main currency for settle international obligations.”

A third group noted changes but attributed these to other factors. A small reserve holder in Europe had made changes due to their strategic asset allocation: “We have made changes to our dollar exposure but it is not related to US Fed policy changes but changes in general strategic asset allocation framework.” An Asian reserve manager had changed duration: “Not specifically on the USD exposure, but more on the adjustment on the interest rate exposure of our USD portfolio,” as had an emerging-market central bank in Europe: “So far we have not adjusted USD exposure but we are considering extending the modified duration of our USD portfolio.”

The European Central Bank has halted its asset purchase programme and has signalled the possibility of a rate hike in 2019. Have you made any changes to your euro exposure in light of this?

Reserve managers remain largely unmoved in their exposure to the euro. Just over 80% of respondents, responsible for $4.5 trillion in reserves, were of this view. This group included nearly all emerging-market and industrial country respondents, and there was a significant overlap with the answer to the previous question: 59 out the 62 also said they had not changed their exposure to the dollar. This group included high concentrations of emerging-market and developing-country central banks, 84% and 75% respectively, and just over two-thirds of the reserve managers from industrial countries.

Comments from respondents fell into three groups: the first noted the impact of negative rates and/or the prospect of a return to positive ones; the second stressed economic conditions in the eurozone; and the third, as with the previous question, stressed the rigid nature of their portfolio framework. In the first group, a reserve manager from a developing country was not yet convinced to make a return: “The [bank] has not had exposure to the euro since 2014 when both money market and fixed income interest rates turned negative. This position is unlikely to change until we see some normalisation in monetary policy and ultimately in interest rates.” A similar sentiment was expressed by a reserve manager from Europe: “Since interest rates became negative in the eurozone, we significantly decreased our euro exposure. Once rates return into the positive territory, we will discuss internally the topic of coming back to euro investments.”

A central banker from the Americas saw the potential to change: “This could have impact on our exposure once rates turn positive.” In contrast, a central banker from an emerging market was unconvinced by economic fundamentals: “Still economic factors are not supportive for this to happen,” while a central banker from another emerging-market country was remaining watchful: “Tactically, we might consider reducing our euro exposure.”

Comments from reserve managers that had made a change were varied, with an Asian central banker noting that it was their practice to keep maturity short: “We try to keep overall euro portfolio maturity as short as possible by investing in positive yielding fixed-income instruments comprising of corporate bonds, financials, Asian names, etc.” Two reserve managers from Europe explained the reasons for their change, including one admitting they had got the timing wrong. An industrial country reserve manager said: “Unluckily our assumptions on a possible rate hike in 2019 was wrong so far as we reduced duration which – until now – was once again not the right decision.” A reserve manager from a transition country saw a rate rise in 2020: “We maintained higher exposure to euros, although we changed our view and we expect the timing of the first ECB interest rate hike to be postponed to 2020.”

Do you see Brexit as having any impact on global central banks and your central banks?

Reserve managers see Brexit as impacting central banks’ holdings of sterling at a global level, with significant effects also felt in back-office operations and counterparty relations. Over three-quarters of respondents, managing reserves worth $3.3 trillion, said sterling reserve holdings would be impacted, with comments overwhelming stressing this would be negative, though often in the short turn. Emerging-market countries featured prominently in this group, and this was overwhelmingly the view among countries in that group. As a reserve manager from Europe explained: “I am sure the UK remains large and strong economy. The problem is short-term volatility of the UK assets including the GBP and the regulatory union break-out.” A similar view was expressed by a reserve manager from the Americas: “We don’t foresee material impact for our case. We believe sterling will continue to be a reserve currency by credit and liquidity standards. Brexit could bring only short-term tactical positions.” A more pessimistic view was offered by a reserve manager from an industrial country: “Brexit will have an impact on different aspects of reserve management, from the short- to the long-term horizon. Holdings of sterling reserves, trading and banking relations with UK counterparties are already being affected by Brexit developments.” A developing country central banker, who also said holdings at their central bank would be affected, put it succinctly: “Reduced appetite for sterling.”

The 26 reserve managers who said their own holdings would be affected comprised just over one-third of the sample. Emerging-market central banks made up just under a half of this group and most of the $1.4 trillion in reserves of that group. A small reserve holder in Europe put their view simply: “Brexit effects everything as it creates uncertainty.” Just under half of the survey respondents thought the euro would be affected, although no comments spoke to this directly.

Slightly more than half of survey respondents said Brexit would impact trading and risk management practices, and just over 40% said it would in their central bank. Within the group of 30 respondents who said their trading and risk management practices would be affected, emerging-market and industrial country central banks were represented: indeed, this was the majority view for these two groups. The 30 reserve managers were responsible for almost $1.7 trillion in reserves. Reserve managers from Europe, both within and outside the eurozone, were among the most forthcoming in their comments. They accounted for most of the 22 reserve managers who said Brexit was impacting both trading and risk management, as well as banking and asset management. A eurozone reserve manager noted an increase in compliance work:

A reserve manager from an emerging-market country was making preparations in case they could not trade with London: “No changes have been implemented in our investment approach. GBP risk is hedged, duration risk is low, credit quality is high. However, we have been preparing to trade with entities outside the UK, in case we cannot do business through London for some unseen legal reason.” An industrial country within the eurozone was experiencing similar back-office issues: “It has mainly had an impact on legal issues of our trading operations and counterparty selection. We do not foresee many short-term changes in holdings of foreign reserves due to Brexit, although we would not be surprised if people would decrease their sterling exposure (if this hasn’t been done yet).”

Reserve managers were most keenly feeling the impact of Brexit in banking and asset-management relations. Thirty-eight reserve managers, responsible for just over $2.2 trillion in reserves, were dominated by central banks from emerging-market and industrial countries. Indeed, only the minority of transition and developing country reserve managers said this part of the work would be affected. A reserve manager from the Americas was fearful of a hard Brexit: “We decided to eliminate the British pound from our benchmark portfolio given the uncertainty around Brexit. Furthermore, a hard Brexit could lead our British counterparties to become ineligible for trading given the higher risk it would pose.” A reserve manager from a central bank in Africa noted the potential for switching focus to a financial centre other than London: “We do have London as our main business centre for the majority of our transactions, and our main partners are located there. If, because of Brexit, some moved to another centre (eg, Frankfurt), it will impact our business and maybe the relation with the partners, demanding us to review our relation, apart from others, with corresponding counterparties.” A reserve manager from the Americas was similarly concerned: “We have some concern about the maintenance of the services with counterparties that cover us from London.”

What is the current duration of your central bank’s reserves portfolio? Has this changed in the past year? Are you considering any change in duration in 2019–20?

Central banks reserves are typically shorter duration, although this is an area of change and many reserve managers expect to lengthen duration over the course of 2019. Just over 60% of respondents said the duration of their portfolio was two years or less. The 1–2 year bucket was the most popular, with just over one-third of all respondents being found there. The 46 reserve managers with duration of less than two years were responsible for slightly under $2 trillion. Here, the clear majority of emerging-market, developing and transition countries have duration of less than two years, but reserve managers from industrial countries were almost evenly split.

The 29 reserve managers with duration longer than two years included several large holders from emerging-market and industrial countries, who as a group were responsible for more reserves than the 46 whose duration was shorter. The 3–5 year bucket was interesting as, with one very large reserve holder removed, the average reserve holding for that group was $8 billion. Indeed, while those central banks with more than $10 billion broadly followed the overall survey in terms of distribution, the distribution for those with less than $10 billion was not as even: almost one-third of this group reported duration of 3–5 years.

The distribution for emerging-market central banks broadly followed that of the overall survey, although a larger proportion of this group (almost two-thirds) were in the 1–3 year range, compared with 56% overall (see Box 1.1). Interestingly, among developing countries, more central banks had 3–5 year duration than 2–3 years: the opposite result to that implied by a normally distributed curve. Industrial countries displayed a tighter distribution, with no central bank reporting a duration of 0–6 months or more than five years. Transition countries were more weighted to the shorter and the longer ends: only one could be found in the middle of the range.

Has this changed in the past year?

Duration is an area of change and active discussion among central bank reserve managers. Just over one-third of respondents said they had changed duration over 2018, and almost 40% were considering a change in 2019. Sixteen reserve managers, 20% of respondents, said they had made a change in the past year and were considering change this year. The 28 reserve managers who said they had changed came mostly from emerging-market and developing countries, although interestingly a majority of transition countries also held this view. They were responsible for just under $2 trillion. There were relatively few comments on changes made, although one emerging-market respondent, who was also considering changing duration in 2019, explained their thinking: “We increased our duration given the increase in interest rate level.”

Are you considering any change in duration in 2019–20?

While an exact comparison is not possible, due to different samples, responses to this year’s survey show growing restlessness among reserve managers. In 2019, 39% of respondents said they were considering a change in duration compared to 28% in 2018. This year’s survey also provides evidence of a shift from the longer part of the short end further out. In 2018, 6 months-1 year category was chosen by 21% of respondents, while, in 2019, this fell to 17%. Moreover, the 2–3 years category increased from 19% in 2018 to 20% in 2019. The preference for the 3–5 years bucket also increased from 14% in 2018 to 17% in 2019.

Looking ahead into 2019, 30 reserve managers said they were considering changing duration. This group was responsible for less reserves – $1.3 trillion – and again this group featured a majority of transition countries. Most comments from reserve managers spoke of intentions to increase duration. A reserve manager from an emerging-market country explained their thinking in an extended comment:

In Europe, a reserve manager was taking their cue from the shift to slower normalisation: “Taking into account slowdown in the monetary policy normalisation among developed economies, we are considering extending the modified duration.” An Asian reserve manager was motivated by concerns over slowing growth: “Since growth projections deteriorated across the markets that we are active in, we consider to increase duration.” An emerging-market reserve manager offered an interesting “structural” explanation for a greater propensity to extend duration: “Accumulation of reserves and introduction of tranching can result in demand for longer duration because the interest risk is the main risk a portfolio of FX reserves can relatively easily bear.” Two reserve managers, both from the eurozone, said they were looking to reduce duration, although they offered slightly different reasons: “Still shortening duration, since the market does not provide return for any risk,” said one, and “We plan to slightly further reduce our duration as the interest rate hikes hopefully have just been postponed,” said the other. Interesting comments were received from a number of reserve managers setting out parameters for how they make their decisions. For one from Africa, the Fed was key:

What is your primary market risk indicator?

Has this changed in the past year?

Reserve managers typically use a suite of risk indicators, with modified duration and value-at-risk the most popular. Over half of respondents, managing reserves worth $3.4 trillion, said they primarily used modified duration, of which 24 also used Value-at-Risk (VaR). Support for these two indicators was broadly similar across economy types, although there is more use of tracking error in developing and emerging-market central banks. Indeed, no respondent from the industrial country group and only one from a transition country reported using this measure. In their comments, reserve managers stressed the portfolio approach to risk measures, as a central banker from an emerging-market economy in Europe explained:

For a reserve manager within the eurozone, the first indicator was VaR:

A reserve manager from the Caribbean explained how their system was changing:

A reserve manager in the Americas was changing their set-up: “VaR was our main market risk indicator, this year we introduced CVaR.”

Do you stress test your portfolio?

Stress testing is an important element of today’s reserve management, especially for large reserve holders. Just over two-thirds of respondents said they made use of this technique, a group that was collectively responsible for $3.9 trillion of reserves. However, there was significant variation within that group, with over 80% and 75% of emerging-market and industrial countries, respectively, saying they made use of stress testing. Among developing countries, stress testing is the preserve of a minority, with only 40% of respondents saying they used the technique. Just over half of the reserve managers who were responsible for $10 billion or less said they carried out stress tests on their portfolio.

In their comments, reserve managers described the types of tests carried out and made a distinction between tests used for the SAA and those for portfolio performance. A transition-country reserve manager employed two types of tests: “Different historical stress tests are done, along with ad hoc scenarios on future events.” A similar approach was noted by a central banker from an industrial country: “Stress tests are conducted on an annual basis and include simulated stress events and isolated shocks.” An Asian reserve manager stressed the portfolio thus: “We assess the impact of extreme events, as well as probable scenarios using forecasts, to our portfolio.” A reserve manager from the eurozone listed the types of stresses: “shocks to underlying asset prices, simultaneous underlying asset and implied volatility shock analysis, stress testing against index.” A reserve manager from Africa said that “backward- as well as forward-looking stress tests are applied.”

Several respondents explicitly mentioned use in connection with their central bank’s SAA. A European reserve manager noted an exercise explicitly related to Brexit: “Stress tests are conducted as part of the strategic asset allocation exercise. We also run ad hoc stress tests. Last year we conducted one to investigate the potential effect of Brexit on our sterling exposure.” In contrast, a central banker, also from Europe, made it clear that these tests were not part of the SAA: “Stress testing does not serve as an input for active management of strategic asset allocation but it serves as an illustration of the future performance shocks.”

Of the 25 respondents who said they did not stress test their portfolios, several described alternatives and a small number indicated they would be looking to add this technique in the future. A reserve manager from the Americas was an example of the first group: “We don’t stress test our portfolios but we make scenario analysis with our active trading.” A central banker from the Caribbean was considering stress testing:

The 2018 Reserve Management Trends survey noted considerable interest in environmental, social and governance (ESG) principles in reserve management. Which of the following best describes your central bank’s stance? (Please check one.)

There is considerable momentum building for the inclusion of ESG into reserve management. Just over a year after the establishment of the Network for Greening the Financial System,²² Launched in December 2017, The Central Banks and Supervisors Network for Greening the Financial System (NGFS) is a group of central banks and supervisors committed to better understanding and managing the financial risks and opportunity of climate change. ten reserve managers, responsible for $1.5 trillion in reserves, are implementing ESG principles in their investment decisions. A further 24 said they were considering this, meaning almost half of the survey sample are positively disposed towards what is a significant change in reserve management governance. The group of ten included two very large reserve holders and was dominated by industrial countries. The 24 considering implementation had stronger representation from emerging-market countries, but only five developing countries and three transition countries could be found in this group. The 40 reserve managers not considering ESG was dominated by emerging-markets and developing countries, with only four industrial country central banks.

Indeed, among industrial countries just over three-quarters are either implementing or considering implementing ESG principles. In contrast, in developing countries 68% are not considering and the figure for transition countries was higher at 70%. Among emerging-market countries, the pattern was similar to the overall survey sample.

Comments from reserve managers described the introduction of the principles and a variety of approaches. “We have started to implement ESG criteria in 2018, the percentage of AUM managed with ESG criteria is currently below 5%,” said a eurozone reserve manager, while a central banker from an industrial country said: “The extent of adherence to ESG investment principles differs by asset class. The percentage of investment portfolio adhering to ESG principles is around 75–100%.” A European central banker described their approach: “We do not have a dedicated ESG portfolio. Where we do active security selection, we consider ESG aspects as one of many relevant aspects. Moreover, we do not purchase securities issued by companies that seriously violate fundamental human rights and systematically cause severe environmental damage.” The comments from the reserve managers who were considering implementing these principles underscored the seriousness with which the issue was being taken. A reserve manager from an industrial country said: “The bank is seriously looking at this and how we might manage it. Currently, 1% of our discretionary assets are ESG-eligible but this is not a target.” A review was imminent in an African central bank: “Currently, we do not explicit consider ESG principles within our reserves management decision. However, we planning to explicit consider in the next revision of investment policy.” An Asian reserve manager noted: “We do not apply this principle yet but are considering it,” and an industrial country reserve manager was actively working on it: “We set up a working group to study what our approach should be.”

If you answered one of the first two options, what were your reasons?

In terms of motivation, moving in line with the market, ethical considerations and an improved public standing were the three main reasons given by reserve managers. A reserve manager from an emerging-market central bank summed up the majority view: “Our institution is committed to ESG principles, and wants to lead by example in the domestic financial system. Diversification advantages of ESG investments are under investigation.” An African reserve manager put it thus: “We will include it because we do identify with the principles/ideas of ESG and also follow best practices.” An industrial country reserve manager, who also cited protection of the portfolio against downside risks, noted: “Reputational benefits and promotion of green finance are also important reasons.” A reserve manager from an emerging market saw an additional benefit: “Apart from ethical reasons, we consider that ESG could be a source of additional information on the bond issuer/counterparty enhancing our internal assessment of this entity. This information is hard to find and include in other ways, using only credit spreads or price volatility, CDS [credit-default swaps], etc.” However, a reserve manager from the eurozone thought this not a challenge investors will face: “ESG bonds are less liquid as their buyers generally have a ‘buy and hold’ strategy.”

If you answered either the third or fourth options, what were your reasons?

Comments from the 41 reserve managers either not considering, or, in one case, having rejected the principles, were divided into those who saw it as a possibility in time and those who were sceptical. “Currently ESG does not feature explicitly as a factor in making investment decisions, but this is likely to change in the near future,” said a reserve manager from Africa. A reserve manager from the Americas acknowledged it as a topic of interest for the future, but was “not yet considering any new policy about it.” An emerging-market reserve manager noted that no part of their portfolio was managed according to ESG principles. “At the moment, we think ESG principles can be costly in terms of liquidity,” they added. In an extended comment, a reserve manager saw four challenges with the topic:

Indeed, defining ESG was the most popular reason given by reserve managers, and comments from respondents reflected evident frustration: “It is hard to establish specific ESG guidelines to determine asset eligibility since there isn’t a common and homogeneous rating system for all assets,” said a reserve manager from the Americas. “Definitions and benefits are not yet clear,” added another. “The market is not deep enough, the market data are confusing, and the effects of ESG, other than financial, are difficult to measure,” said a European reserve manager. “We would add the longer duration of these instruments in general,” said a reserve manager from an emerging-market country, and “The ESG universe in some currencies is too small,” said a respondent from a European country.

Do you apply any form of tranching in the management of your central bank’s reserves?

Tranching of reserves – the division of a reserves portfolio into separate portfolios according to function or need – is an intrinsic part of reserve management. Almost 70% of respondents said they made use of this technique. The most common approach was to have two tranches, which were typically focused on liquidity and investment, although examples of three, four and five tranches were given (see Box 1.3 below). The 55 reserve managers, responsible for $3.8 trillion, were largely drawn from emerging-market and developing countries. Indeed, there was a considerable divide, with 90% of developing and transition country central banks, and 72% of emerging-market countries, employing tranching, while only 28% of reserve managers from industrial countries said they used the technique.

Reserves size is also a factor: 80% of reserve holders with less than $10 billion tranche, but the share drops to 60% for those holding more than that figure. In their comments, reserve managers described their holdings of two, three, four and, in one case, five tranches. A Middle Eastern reserve manager employed the “Classical split between liquidity tranche and investment tranche.” This was also employed in Eastern Europe: “Liquidity and investment. The main purpose of the liquidity tranche is to meet the demand of the reserve currency.” However, a reserve manager in the Caribbean was looking to add: “We have historically used two tranches. We are working towards implementation of a third tranche.” A reserve manager from a transition country explained how their central bank divided “net reserves”: “Net reserves are divided in three tranches with different horizons. Also, liabilities to third parties are a different tranche to net reserves and managed against an ALM framework.”

An emerging-market respondent had “liquidity, government and investment (partly high-grade credit) portfolios,” and a reserve manager from Africa reported “three tranches, working, liquidity (or buffer) and investment.” Four tranches were to be found in a developing country’s reserve management framework: “The reserves are divided into four tranches: namely liquidity, investment, stable and special purpose.” In a central bank in the Americas, four tranches were employed: “We have four portfolios with different time horizons. The shorter portfolio goes from zero to three months and the longer from one to five years.”

In an extended comment, a reserve manager from the Americas described their tranching system:

The 25 reserve managers that did not tranche reserves were responsible for just under $3 trillion, and were dominated by industrial country central banks. A European reserve manager explained: “We do not apply a formal tranching, however we do have a flexible portion of our reserves for long-term investments in non-traditional reserve management asset classes, eg, equities, convertible bonds, emerging markets.” A reserve manager from an emerging market in Europe did split the portfolio, but not on the basis of liquidity: “Not tranching in terms of liquidity, however, we have several portfolios besides main investment portfolio.”

Has this changed in the past 2–3 years?

Change is a feature of reserve management tranching arrangements, with almost 40% of respondents saying they had made changes in the past two to three years. The 29 reserve managers that had made changes were responsible for $1 trillion in reserves. Only three reserve managers from industrial countries reported changes, whereas half of respondents from transition countries had altered their arrangements. Many of the comments spoke of changes in the liquid tranches. An African reserve manager had seen its liquidity tranche grow along with its reserves: “We had our liquidity tranches increasing due to increases in international reserves.” In the Americas, the liquidity share has increased for one central banker: “In the last years, the central bank has increased gradually the percentage of the liquidity tranche.” A small reserve holder in the Western Hemisphere said they were “Holding [a] higher level of liquidity.” Two reserve managers mentioned changes in the investment area: “Regarding the percentage, since the reserves have been decreasing the investment and gold reserve tranche gained more participation to the total reserves.” A European reserve manager had been diversifying: “We have been diversifying away from interest rate investments into long-term investments like equities and real estate.”

Two respondents from Europe described how they had moved away from tranching, with one explaining in detail why:

When accounting for your reserves, do you designate any of your reserves as “held to maturity”?

Designating reserve assets as “held to maturity” is a minority activity among reserve managers broadly but popular with European central banks. For those who are proponents of this accounting technique, the reasoning is clear: accounting in this way has the potential to lower volatility in the balance sheet, and therefore potentially income as well. “Accounting certainty”, said one European reserve manager, “Long-term strategy and less volatile results,” said another. “To avoid price fluctuations in those securities that don’t need to be liquid,” said a reserve manager from the Americas, and “For protection against increasing interest rates,” said an Asian reserve manager. An emerging-market central bank had recently implemented this: “HTM portfolio is currently very small as we just started to build it. Motivation behind this portfolio would be to have stable and predictable income over the years.” A transition country reserve manager was looking to smooth income: “Part of our invested fixed-income securities are classified as held to maturity securities (investment securities held at amortised cost) with the intent to reduce interest rate exposure and obtain stable income in a low-yield environment.” An industrial country respondent noted that in the past they had, but that now their portfolios were marked-to-market: “The assets of investment portfolio are reported using marked-to-market accounting. We do actively explore the possibilities to set up a ‘held to maturity’ portfolio and have done so in the past.”

In terms of size of holdings, percentages varied from less than one to 100%. Twenty-four respondents provided data on their held to maturity portfolios. Overall, these 24 were responsible for $284 billion. The simple average percentage was 38%, but across the group $71 billion, or 25%, was held to maturity.

Do you make use of any algorithmic trading strategies in your reserve management?

There is little interest in algorithmic trading among reserve managers. Only one respondent, from a central bank in the Middle East, said they used these in their operations: “Some of our FX transactions and equity futures are traded using algorithmic. It is currently done for a relatively small percentage of our total turnover on these transactions.” A reserve manager from an emerging-market central bank did note that these were used on their behalf: “We do not use algorithmic strategies directly. However, our counterparties execute our FX orders using algorithms.” A central banker in Asia said they were looking into these: “We are considering this option to help portfolio managers in their decisions.”

What proportion of your reserves is managed by external managers?

External managers are a key part of modern reserve management. Seventy-two reserve managers, responsible for just over $4.7 trillion in reserves, outsource management of some share of their reserves. The simple percentage average for the proportion outsourced was 11.7%. Applying mid-points to the intervals to the total reserve holdings gives a figure of $457 billion, or just under 10% of the holdings, for a weighted average. Most central banks outsource less than 20% of their portfolio: 82% of respondents selected either of the first two options. This pattern was largely reflected among respondents from emerging-market, industrial and transition countries, but responses from developing countries were quite different. Only 40% of respondents outsource 0–20%, but more than 25% outsource 31–40% and more than 10% outsource 41–50%.

With less than 10% outsourced, the most popular category, three European reserve managers each mentioned a specialist portfolio: “long-term investments”, “US agency MBS” and a “small equity tranche”, and two respondents said their only manager was the World Bank. Emerging-market respondents were prominent in this group, but it also featured 12 industrial countries and eight transition. Others in this bracket were more expansive, such as this European central banker: “We have four external managers, but they have only risk budget they are expected to use to generate active return (using derivatives), no assets. Out of our overall risk budget they have around 40%.” A reserve manager in the Americas expanded on their use: “We recently added a corporate bond mandate managed externally, and we increased our absolute return mandate given its good performance over the last two years.”

Emerging-market central bankers dominated the 11–20% bracket: eight of the 12 were from this group, which featured a number of larger holders, and were collectively responsible for slightly over $1 trillion. With external managers managing larger shares of reserve portfolios, the number of mandates and asset classes tended to increase. An emerging-market reserve manager was adding agency MBS: “We use external manager for equity portfolio management and will shortly start using them for US agency MBS portfolio.” A Middle East central banker uses external managers for equity and corporate bonds: “Our equity investment is done using external managers as well as part of our corporate bond investment,” an approach echoed by a European central banker: “External managers are responsible for our equity and corporate bonds (investment-grade and high-yield) portfolios.”

Only five respondents reported shares of 21–30%, with developing countries accounting for three of these. As a group, they were responsible of $75 billion. As outsourced reserves increase beyond 20% of the portfolio, so the breadth and depth increase. A reserve manager from the Americas described their approach in broad terms: “We use managers for active global mandates that increase return, diversification and knowledge transfer.” A reserve manager from an emerging market employed four external managers: “Two of them have a mandate on US Treasuries and the others have a mandate on non-US sovereigns.” The five reserve managers that outsourced more than 30% were all from developing countries, and were responsible for $18 billion. For a small reserve holder, the 30% it outsourced was divided between two suppliers: “The bank has two external mandates, and the managers currently manage slightly over 30% of the overall portfolio.”

Where, over the next 2–3 years, do you see potential for use of external managers in your central bank?

Overwhelmingly, reserve managers see potential for external managers to provide services in new asset classes. This is the prime area of opportunity in their view. Over 80% of respondents took this view, and they were responsible for $2.5 trillion in reserves. Almost 40% said that active management would be an area where they could envisage external managers adding value, and one-third of respondents thought it would be new markets. Support for active management was particularly noticeable among emerging-market and developing countries: more than 40% for both groups overall. The corresponding figure for industrial countries was 18%.

For an Asian reserve manager, it was the chance to diversify: “Issues like not investing in derivatives, willingness of exposure to other hard currencies apart from USD, EUR and GBP can be achieved via external mandates.” An African central banker saw scope along similar lines for their portfolio: “The current portfolio has room for further diversification.” A reserve manager from the Americas who saw potential in new assets, markets and currencies, was interested in absolute return: “We believe that absolute return strategies have the biggest potential, not only in terms of return, but because they could provide access to new asset classes, markets and currencies. They also provide more insight into different types of management styles and investment strategies that could be replicated internally.” Active management was stressed by this eurozone reserve manager: “I personally believe in active management styles which in the long run deliver alpha. Nevertheless, new asset classes will get into our focus and in the portfolio context worldwide diversification becomes more important to preserve your own reserves.”

A reserve manager from Africa set out their thinking: “If we add new external managers, it will be to explore new markets (in particular emerging markets), and using them as a benchmark, and exploring the knowledge transfer and their network.” A developing country reserve manager thought that external managers would useful if the central bank added gold, as was being discussed: “There is some consideration around including gold to the bank’s foreign reserves asset universe. Should the bank decide to trade derivative products such as gold swaps and forwards or participate in the lease market, an external manager may be engaged.”

A transition country reserve manager saw scope for new assets and new markets, but attached greater credence to other areas of the relationship:

A small number of respondents expressed scepticism around further involvement. A reserve manager from Africa saw potential only in benchmarking: “External managers are struggling to provide alpha, and they charge huge management fees and the view of a possible movement into benchmarking.” A reserve manager from an emerging-market central bank was dubious from a cost/benefit point of view:

Which of the following best represents your view of the value gold brings to reserves portfolios in central banking today? (Please rank 1–6, with 1 being closest to your view.)

Reserve managers see value in gold chiefly for its safe haven and portfolio diversification properties. Almost three-quarters of respondents ranked safe haven first or second, with nearly half the sample placing it first. The 46 respondents who placed it first or second were drawn mainly from emerging-market and developing countries, and were responsible for $2.3 trillion. Only five industrial countries supported this view. Two-thirds of respondents placed portfolio diversification first or second, although marginally more favoured second place than first. These 41 reserve managers were responsible for slightly more in reserves: $2.6 trillion. Emerging-market countries were again well represented, but only half the developing countries that responded were of this view. More industrial country reserve managers favoured portfolio diversification than the safe haven option, and industrial countries were most prominent in the group of 15 who saw gold holdings as symbolic in value. Only three developing country reserve managers and one from a transition country were of this view, however. Inflation hedging was supported by 20% of respondents, but this was mainly due to its popularity as a second choice: 11 reserve managers put it second. There was little support for gold bringing value to a portfolio due to liquidity, either on a trading or last resort basis.

Do you see central banks globally increasing or decreasing their exposure to gold over the next 2–3 years?

Which of the following best represents your view of the value gold brings to reserves portfolios in central banking today? (Please rank 1–6, with 1 being closest to your view.)

That central banks will increase their exposure to gold over the next two to three years was the view of an overwhelming majority of survey respondents. This group of 57 was responsible for $4.3 trillion, and included representation from across economic groups. In their comments, reserve managers stressed geopolitical concerns, often allayed by market volatility, diversification and portfolio rebalancing – ie, maintaining gold’s share in a reserve portfolio as the foreign exchange part increases. A comment from a transition country central banker summed up these themes:

These views were echoed by a reserve manager from an African central bank: “Central banks collectively are expected to remain net buyers for reasons such as diversification, geopolitical risk and rebalancing.” A central bank that did not actively manage gold explained why safe haven was their first choice: “Trade barriers, economic and political crises, which significantly affects stability and predictability of global financial markets, at the same time encourages central banks to invest more in the safe asset classes in their reserves.” This was echoed by an industrial country central bank: “Global instability and geopolitical issues are driving central banks, especially from emerging markets, to increase their gold holdings. This trend may continue along 2019.”

Picking up concerns over geopolitical risks noted earlier in the survey, for a reserve manager from North Africa, recent events have seen reserve managers return to their primary focus: “Heightened geopolitical and economic uncertainty throughout the year increasingly drove central banks to diversify their reserves and re-focus their attention on the principal objective of investing in safe and liquid assets.”

Rebalancing of portfolios was mentioned by several respondents, with one from Europe noting that gold acquisition would increase with reserve growth:

A thoughtful comment from an African reserve manager spoke of two overlapping effects driving growth in holdings:

Have you added (removed) and any asset class to (from) your central bank’s reserve portfolio in the past 12–18 months?

Central banks continue to diversify, adding asset classes across sovereign and corporate bond markets, as well as equities, gold and derivatives. In this trend, emerging-market central banks lead the way: over half of the group of 27 central bankers that said they had added an asset class were from this group. In contrast, less than a quarter of developing country central bankers said they had added an asset class in the past 12–18 months. This group of 27 included seven central banks with reserves worth more than $100 billion and was, as a group, responsible for more than $1.7 trillion.

In their comments, reserve managers detailed the moves they had made. The most popular asset mentioned was corporate bonds, with emerging-market bonds, mortgage-backed securities, exchange-traded funds (ETFs), equities and inflation-linked bonds also mentioned. A central banker from the Middle East had made an “investment in investment-grade euro corporate bonds,” while a reserve manager from the Americas had added this asset class as well as sovereigns: “We have added a corporate bond mandate and we included government bonds from Australia and New Zealand in our benchmark portfolio.” A central banker from the Caribbean said “US agency MBS have been added as a strategic asset class and will be actively managed.” Two central bankers, one from the Americas and the other from Asia, explicitly mentioned a move into ETFs, with the former specifying US equities and fixed income. A eurozone manager revealed an interesting combination of assets being added: “We removed nothing but added gold and via an external manager started investing in emerging markets and non-investment grade bonds.” A transition country reserve manager had moved into an asset class with an eye on a particular arbitrage: “We began investing in inflation-linked bonds on the short end of the yield curve to capitalise on mispriced break-even levels of inflation using these instruments.” A transition country reserve manager was adding derivatives: “Added exchange-traded options on eurodollar futures, covered bonds and FX forwards.” Two reserve managers mentioned they had added gold and one, from the Middle East, while not saying if they had added or removed an asset class, offered the following interesting observation: “In an environment of low or negative yields, gold offer a safe place to obtain 0% return (which may be higher than other safe alternatives).”

Which view best describes your attitude to the following asset classes? (Please check one box per asset class.)

Reserve managers remain committed to government bonds, the traditional mainstay of reserve management, but are actively exploring new asset classes. In their comments, several reserve managers listed what investments they were in, while others noted where they were constrained. A reserve manager from Asia described their portfolio thus: “We are investing in government bonds, corporate bonds, emerging-market bonds, inflation-linked bonds, agencies, deposits, ABS, MBS, covered bonds, gold, equities.” In contrast, a reserve manager from Africa was more restricted: “The bank’s investable universe is restricted to obligations of sovereign governments, sovereign agencies, supranationals and multilaterals with a minimum credit rating of A–. In addition, deposits with banks with the minimum rating of A– is equally permitted.” A reserve manager from the Americas who was considering covered bonds noted that their investments “are restricted to high-quality asset classes,” and a reserve manager from the eurozone commented “New investment classes have to make sense from a risk perspective and our risk appetite.”

Almost all respondents said they invested in high-quality government bonds with little appetite (or room) for further expansion. There was strong support for deposits too: 86% said they use this service, along with 100% of central banks from developing and transition countries. Corporate bonds enjoyed support from just over 40% of survey respondents, with a further 20% saying they were considering this class either now or in the next five to ten years. Almost one in three reserve managers invest in emerging-market bonds, with a similar proportion considering investing. This was a particularly popular asset class among developing countries: almost half said they invested. A reserve manager from Asia commented: “We consider to invest in Chinese financial markets both internally and externally and in other Asian countries through external managers.” Almost 40% of reserve managers invest in inflation-linked bonds and the same proportion are again considering investment. A European reserve manager who was investing commented on this asset class: “Inflation-linked bonds might be attractive in the medium-term horizon if inflation rises and central banks are slow to react to the increasing price pressures.” Just over half of respondents from emerging-market central banks invested in these bonds. There was considerable support for agency paper: 85% of respondents said they had exposure to this class, with support highest among industrial country respondents, at 90%.

Mortgage-backed securities are more popular than their asset-backed counterparts, although the same numbers are considering these two classes. Among emerging-market respondents, investment in MBS was higher than the survey overall but lower for ABS. Half of developing country respondents said they invested in MBS, but only one in five industrial country reserve managers did. Covered bonds feature in the portfolios of just under half the respondents, with industrial and transition countries leading the way: over 60% of respondents in both cases invest in this asset class. Just over 20 reserve managers were considering investing in gold, in addition to the 50 who said they already did. One in four respondents to the survey invest in equities, with a further 20% considering the class.

If your central bank is investing in equities, please say how you access this asset class?

Equities are developing as a reserve asset with central banks exploring a number of channels to gain exposure. Among the 20 reserve managers that responded, industrial countries had the greatest representation: eight compared to six from emerging markets, four from transition counties and two from developing countries. These central banks were responsible for $1.76 trillion, and included five with holdings of more than $100 billion. Interestingly, ETFs were the most popular choice, although in four cases this was paired with another method of investing. Among industrial countries, however, direct purchases and a passive mandate enjoyed the same level of support as ETFs. Within emerging markets, passive mandates and ETFs were favoured: only one reserve manager said they made use of direct purchases and this was in combination with a passive mandate. A further two reserve managers commented that they did invest in equities but these were externally managed. Several respondents noted that they were prevented from investing in equities, with one reserve manager from the Americas noting: “The law ruling the central bank prohibits the investment in equities, even though we do believe they provide diversification benefits.”

Which view best describes your attitude to the following currencies? (Please check one box per currency.)

Reserve managers are expanding their currency horizons. They now invest in currencies that previously would not have been considered from a reserve management perspective, and, in contrast, to historical norms of block holdings of major currencies, they are acquiring small exposures to a range of currencies. The currencies surveyed can be bracketed into four groups, based on the number of central banks investing in them. The four stylised groups are: “emerging reserve currencies”; Scandinavian; Asia–Pacific; and “developing” reserve currencies. The first group consists of the Australian and Canadian dollars and the renminbi. Of these, the most popular was the Australian dollar: 60% of respondents said they had exposure to this currency, which was closely followed by the Canadian dollar with 56%. The central banks holding these currencies are responsible for $3.4 trillion and $3.1 trillion, respectively. There was considerable overlap in terms of holdings: 35 central banks said they held both. A further 13% and 17% of survey respondents, respectively, were considering investing in these two currencies. Just over half of the reserve managers surveyed said they invested in the renminbi. These 37 central banks were responsible for $3 trillion. Interestingly, the renminbi had the highest figure for those considering investment: 20 reserve managers (28%) said they were either considering it now or would do so in the next five to ten years. Support for these three currencies was particularly high among emerging-market and developing countries. In emerging markets, the Canadian dollar is more popular: just over three-quarters of respondents said they invested in this currency. Support for the renminbi and Australian dollar was the same at 69%. In developing countries, 67% of respondents invest in the Australian dollar, with support for the renminbi and Canadian dollar at 53% and 50%, respectively. Among industrial countries, 50% said they invested in the Australian dollar, with less than half investing in the other two. In transition countries, the figures were less than half – with only 10% invested in the renminbi.

Scandinavian currencies enjoy significant minority support, with around one-third of respondents saying they invest in the “crowns” of Sweden, Norway and Denmark. The addition of several large holders meant that those investing in the currencies of Sweden and Denmark were responsible for nearly $2 trillion, as opposed to a figure of $1 trillion for Norway’s krone. Again, as a group emerging-market and developing country central banks are in the main more exposed to these three currencies: just over 40% said they invested in the Swedish krona. In developing countries, 38% each invest in the three currencies and there was a high degree of crossover, with five central banks holding all three. Among reserve managers for industrial countries, the percentages holding the Swedish and Norwegian currencies were lower than the survey average, but that for the Danish krone, at 40%, was considerable higher. Again, support among transition countries was much lower.

The third group, of Asia–Pacific currencies, enjoys support ranging from 21% to 28% of reserve managers. The most popular was the New Zealand dollar with 28%, but these 19 central banks had the lowest holdings at just under $1 trillion. Holders of the Korean won were responsible for $1.8 trillion, and for the Singapore dollar the figure was $2 trillion. Again, emerging-market central banks were more exposed to these three currencies than the average with shares around 30%. Developing country reserve managers were also more disposed towards these currencies – notably the New Zealand dollar, which nearly half of this group invests in. Industrial country reserve managers are less inclined to invest in these markets, with the Korean won the most popular at 19%. Beyond these three groups, a range of currencies have “fringe” reserve currency status with single digit percentage support. The most popular of these was the South African rand, which 9% of respondents said they were exposed to, all but two from Africa.

The IMF added the renminbi to the SDR in October 2016 with a weight of just below 11%. What percentage of global reserves (your reserves) do you think will be in the renminbi by (end of 2019, 2020, 2025, 2030).

Reserve managers see renminbi holdings rising steadily over the next decade, with a majority of respondents envisaging China’s currency accounting for 10–20% of global reserves by 2030. Just over 60% of respondents, responsible for $2 trillion in reserves, were of this view, and significant minorities think it will reach this point sooner. Emerging-market central bankers were well represented in this group of 37, which was responsible for $1.8 trillion. Overall, on average reserve managers see the renminbi accounting for 7.4% of global reserves by the end of 2020 and reaching just short of 14% over the next ten years. Across groupings, developing country central bankers were the most optimistic: the average figure was 18% by the end of 2030. Central bankers from industrial countries and emerging markets are more cautious: in both cases, the average figure for the same year was 12%. Reserve managers from Asian central banks were more optimistic than the survey overall: on average they see the renminbi making up 17.6% of reserves by 2030. The most optimistic were African central bankers, where the average was 18.25%, as one, who thought the renminbi would account for 30% of global reserves, explained: “The proportion of renminbi is likely to grow significantly in the near future as the importance of China in the world economy grows.” An Asian central banker saw holdings rising to 25%: “The reserve position in CNY is an increasing trend in global reserve management. So this may go up to 25% of global reserves.” From Europe, a reserve manager envisaged a 22% share by 2030: “Holdings in global reserves in the long run will reflect the economic strength of China as well.” Another reserve manager from Asia noted the renminbi’s increasing integration with financial markets: “The inclusion of RMB-denominated bonds in major indexes would drive the increase in allocation of global reserves to this currency.”

Several reserve managers, especially from the emerging markets, offered more cautious views, with a central banker from the Americas expecting growth in the renminbi to be “steady.” A European central banker expected holdings to rise to 10% by 2030: “We expect the percentage of renminbi exposure to increase in the future, although we believe there is still a long way to go, mostly due to challenges in investing in the Chinese financial markets.” The same view was taken by a reserve manager from Africa:

For a reserve manager from the Americas, the combination of slowly liberalising markets in China and traditionally inert central banks would mean “the adoption of the renminbi as a reserve currency will entail a slow process.” A reserve manager from Europe saw holdings in 2030 at 7% slower than the take-up in international payments:

A reserve manager from the Middle East looked to the state of the markets as the reason why holdings would be 5% in 2030: “There is significant currency risk in renminbi and the market needs to develop further to compete for allocation from alternatives like USD, EUR and GBP.”

Central banks are more cautious when it comes to the evolution of the renminbi in their own holdings. For respondents as a whole, the average expected figures are around half that for global holdings. Well over half of respondents expect the renminbi to account for less than 2% of their reserves, and nearly one-third see it at less than 1% by the end of 2020. While the numbers for global holdings were fairly tightly distributed, the responses for own reserves stretched across the range: 15% think their holdings will be less than 1% in 2030; not one thinks global holdings will be less than 1% in 2030. Respondents from developing countries were again the most optimistic: reserve managers here anticipate China’s currency making up 9.29% of their own reserves by 2030. Thirty-five percent of reserve managers in this group think the renminbi will account for 10–20% of reserves by 2030. Emerging-market central bankers, with an average of 7.82%, were close to the survey overall, and industrial countries on average think only 5.43% of their reserves will be in the renminbi.

Comments from respondents spoke of concerns over capital controls, administrative burdens and the development of bilateral trade. The first element was a concern for a reserve manager from the Americas who saw their holdings levelling off at 5%: “As long as the Chinese government keeps implementing capital control measures, we will be reluctant to add a substantial exposure to said currency. Our exposure to CNY/CNH will be a function of the level of liberalisation that the Chinese markets display.” A number of factors, including product development, were important for this reserve manager from Africa: “As our currency allocations depends on ALM [asset–liability management] of our country, if the financial exposure of [country] increases over China, and the CIBM introduces news products, rules that converges with the international standards, and free capital markets, by 2030 we will definitely have more exposure to this financial segment.” A European reserve manager saw their holdings reaching 10% by 2030, but noted the challenges along the way: