Taiwanese investors are increasing their stakes in yuan-denominated funds to take advantage of an expected rise in demand for the Chinese currency after the IMF on Monday admitted the yuan to its global reserve currency basket.
Yuan-based funds totaled NT$44.2 billion (US$1.34 billion) for the first 10 months of the year, rising 20 percent from the end of last year, the Securities Investment Trust and Consulting Association (證券投信投顧公會) said on its Web site.
The increase came even though interest in yuan deposits and Formosa bonds, or yuan-based bonds issued in Taiwan, show signs of a slowdown amid growing yuan volatility in line with market fluctuations.
The yuan’s inclusion as a reserve currency is expected to fuel a gradual pickup of diversification inflows into yuan assets from international investors and reserve managers, with the latter to play a critical underlying support role for the yuan in coming years, Standard Chartered Bank said.
The British lender forecast that inflows might reach US$85 billion to US$125 billion next year alone, considering that 5 percent of global reserves might be denominated in the yuan by the end of 2020.
Central banks are likely to favor products such as yuan bonds issued by the Chinese government, state banks, high-quality corporate bonds and multinationals, Standard Chartered said.
State-run First Securities Investment Trust Co (第一金投信, FSITC) voiced similar views, saying China might challenge the US’ status as the world’s largest capital market over time.
China would continue to free its capital markets and export yuan to gain international influence through the introduction of cross-border infrastructure projects in the region, FSITC vice president John Lo (羅瑞民) said by telephone.
Yuan-based deposits in Taiwan have slowed because interest rates for time deposits have dropped from 4 percent last year to 3 percent or lower this year following a series of interest rate cuts by the People’s Bank of China, Lo said.
Yuan-linked funds are popular in Taiwan because they generate higher returns and the trend is set to continue as the currency joins the IMF’s special drawing rights basket, effective in October next year, Lo said.
Despite prevailing expectations of short-term value losses, the yuan might stage a comeback in the long run as is the case with the greenback, yen and euro, FSITC said.
The local fund house plans to issue a yuan-denominated high yield bond next week to capitalize on growing demand for yuan assets.
Taishin Investment Trust Co (台新投信) agreed that the IMF move would help boost confidence in yuan assets. Asian high yield bonds provide average returns of 7 percent, stronger than peers elsewhere, the fund house said.
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