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Jun. 22 – Malaysia’s central bank has been allowed to purchase and hold Chinese government debt as part of its foreign reserves strategy and as a possible hedge against the weakening U.S. dollar.
Should the Bank Negara Malaysia decide to use its allotted quota for exchange-traded equities and debt, it would be the first foreign central bank to do so.
The Chinese economy has been showing growth driven by massive spending on infrastructure despite a hard-hit export industry. This growth is making the Chinese market attractive as an alternative to investing in U.S. or European bonds. China and Malaysia have already agreed to a currency-swap last February that would ease the flow of the renminbi and ringgit in both countries.
“The yuan bond market is certainly not a liquid instrument, so you can’t start maxing out your reserve holdings in yuan because it simply doesn’t meet your primary concern as a central bank,”Stephen Green, an economist for Standard Chartered in Shanghai told the WallStreet Journal.
The renminbi while stable is still a blocked currency outside China and its prospects as a global reserve currency in the future will still take years to happen. Malaysia has a reported US$88.3 billion in international reserves since May.
