Latest reports from the People’s Bank of China for May indicate that the World’s No. 2 economic power has kept its official gold reserve unchanged – at 59.24 million ounces (1,842.6 tonnes) – for the seventh successive month. Indeed China’s officially reported gold reserves have remained unaltered since the Chinese renminbi (or yuan) was confirmed as an integral part of the IMF’s Special Drawing Right (SDR) back in October last year. Currently the Chinese currency accounts for 10.92% of the basket of currencies which make up the SDR – the others are the US dollar 41.73%, the Euro 30.93%, the Japanese yen 8.33% and the pound sterling at 8.09%.
The IMF notes on its website that the SDR was created in 1969 as a supplementary international reserve asset, in the context of the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves – government or central bank holdings of gold and widely accepted foreign currencies – that could be used to purchase its domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets – gold and the US dollar – proved inadequate for supporting the expansion of world trade and financial flows that was taking place. Therefore it was decided to create a new international reserve asset under the auspices of the IMF.
Although the idea was to create a new reserve currency as defined by the SDR basket, the composition of which is reviewed every five years, the inclusion of a currency in the basket does lend a degree of acceptance as a potential reserve currency in its own right, which is presumably why China was so keen for the renminbi to become part of the SDR basket. To help achieve this the Chinese central bank began to announce monthly additions to its gold reserves in the interests of transparency. Prior to that it had only announced its gold reserve increases at five or six year intervals saying that this additional gold, which it then moved into its official reserve, had been held in accounts which were outside the purview of its gold reserve reporting to the IMF.
This post was published at Sharps Pixley