Israel adds yuan to $206 billion in reserves in ‘philosophy’ shift

(Bloomberg) – Israel’s central bank has made the biggest changes to its reserve allocation in more than a decade, adding the Chinese yuan alongside three other currencies to a stock that topped 200 billion for the first time. dollars last year.

Starting this year, the currency mix will change from the trio of US dollar, euro and pound sterling to include the Canadian and Australian dollars as well as the yen and yuan, also known as the renminbi. The additions mark a change in “the Bank of Israel’s overall investment guidelines and philosophy,” Deputy Governor Andrew Abir said in an interview.

Following discussions held by the monetary committee last year, the pound and the yen will account for 5% and the currencies of Canada and Australia will account for 3.5% each. Under the new approach, the yuan’s share is set at 2% for 2022, according to the Israeli central bank’s annual report released late last month.

To adjust to the changes, the euro’s share will fall to 20% – the lowest in at least a decade – from just over 30%, while the dollar will be 61% from 66.5%. The weighting of the pound, on the other hand, will nearly double to 5%, returning to a level last seen in 2011.

The “dramatic” increase in Israel’s foreign exchange reserves has led the central bank to lengthen its investment horizon, Abir said. “We are looking at the need to earn a return on reserves that will cover liability costs.”

A program of monetary interventions launched more than a decade ago by then-Governor Stanley Fischer to stem the soaring shekel helped the central bank amass reserves that now exceed a third of gross domestic product. They amounted to just over $206 billion at the end of March.

Israel’s shift in the allocation of its holdings brings it closer to the rest of the world, although it has yet to invest in another of the world’s main reserve currencies, the Swiss franc.

The International Monetary Fund’s survey of the currency composition of official foreign exchange reserves shows that at the end of last year the euro accounted for almost 20%, the dollar just under 59% and the pound nearly by 5%. The yuan rose slightly from the third quarter to hit a new high of 2.79%.

The greenback’s share, on the other hand, fell to its lowest level since 1995, largely to the benefit of the euro, the pound, the Canadian dollar and the yuan. The recent seizure of a large chunk of Russia’s foreign currency holdings as part of international sanctions against its invasion of Ukraine could prompt countries to further reconfigure their reserves.

Biggest swing

China has pushed for a greater international role for its currency, although the yuan’s prospects are held back by its limited convertibility and tight management by authorities. Yet recent reports that Saudi Arabia is in talks with Beijing to price some oil sales in yuan have only added to speculation that the currency will expand its global use in commodity trading. commodities because it benefits from an accelerated dedollarization in the wake of the Russia-Ukrainian War.

Latin American countries have invested nearly $30 billion in yuan assets over the past five years, according to Goldman Sachs Group Inc. more than $1 billion in yuan reserves in February alone.

Israel’s new currency basket also reflects the transformation of the country’s trade flows as it developed a booming tech industry with global reach and discovered offshore natural gas to become self-sufficient and even export the fuel.

While the United States is still Israel’s largest trading partner ahead of China, according to data compiled by Bloomberg, overall volumes with the Asian economy have surged, nearly doubling between 2016 and 2021. In Europe, the Germany and Switzerland account for the largest trade with Israel.

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