Gold reserves underpin stable yuan seeking globalization



The rise of gold as part of China's international reserves and the central bank recently publishing yuan-denominated external debts are conducive to a stable yuan, analysts said on Monday.

Official data showed the country's gold reserves hit 1,658 tonnes at the end of June, jumping nearly 60 percent compared to the figure last released by China's central bank at the end of April 2009.

Although countries have long abandoned the gold standard as the basis of monetary systems, gold reserve volume remains an important factor in market assessment of a country's currency value due to its price stability, according to analysts.

The central bank said the gold reserve increase was in line with the nation's needs to keep adjusting the structure of its international reserves assets in order to ensure the assets' security, liquidity, and value increase.

"China's increasing gold reserves will strengthen yuan holders' confidence, which will help stabilize the exchange rate and facilitate the internationalization of the yuan," said Xu Mingqi, a researcher with the Shanghai Academy of Social Sciences.

"A more important role of gold reserves lies in risk prevention. It helps boost confidence in a country's currency, and reflect the country's economic and financial strength," said Ding Zhijie, a professor at the University of International Business and Economics.

China is the world's largest gold producer and a major gold consumer. The updated figure also revealed China surpassed Russia to become the fifth largest holder of gold reserves around the world, behind the U.S., Germany, Italy and France.

Gold reserves account for a small part of China's foreign exchange reserves, which hit 3.69 trillion U.S. dollars as of the end of June. The central bank said it would flexibly adjust its gold holdings according to its reserves and investment needs in the future.

Yuan's Rising Influence

The data came as China looks to advance its currency's status as a key international reserve currency, which is now a prime candidate for the International Monetary Fund's (IMF) special drawing rights (SDR).

The international reserves data was released by using the special data dissemination standard (SDDS) established by the IMF in 1996 to enhance the availability of timely and comprehensive statistics, according to the People's Bank of China, China's central bank.

By using the standard, the central bank has widened its external debt calculations by introducing yuan-denominated external debt for the first time, which stood at 4.94 trillion yuan, about 48.1 percent of China's total foreign debt, central bank data showed.

"Improvement of the nation's financial data disclosure, would better meet the IMF's requirements on information disclosure, and have a positive impact on yuan's inclusion into the SDR," said Xiao Lisheng, a research associate at the Chinese Academy of Social Sciences.

The SDR is an international foreign exchange reserve asset comprised of a weighted basket of four currencies, including the U.S. dollar, euro, British pound and Japanese yen. The value of a country's total exports and imports, as well as whether a currency is fully convertible under the capital account, are taken as two key criteria for SDR entry.

At the last SDR review in 2010, the yuan met the first criterion, but was assessed as not meeting the "freely usable" criterion. The IMF is expected to vote on the yuan's inclusion late this year.

"Overseas markets are showing greater demand to hold yuan-denominated assets as yuan's global status keeps rising. This has also reflected their confidence in China's economic development and achievements in reforms," the central bank said in a statement.

Since July 2009, China has taken a raft of measures to push for the yuan's globalization, such as currency swaps with more than 30 countries and regions, setting up yuan clearing banks in foreign cities and allowing direct trading between yuan with other major currencies including euros and pounds in the inter-bank foreign exchange market.

With these measures and China's efforts to promote greater convertibility of yuan under the capital account, the Chinese currency, also known as RMB, became the world's No. 2 currency for trade finance globally in 2013, and overtook the Canadian and Australian dollars to enter the top five world payment currencies last year, according to global transaction services organization SWIFT.

Cheng Yulu, president of Renmin University of China, said China's Belt and Road Initiative is also poised to offer strategic opportunities for yuan's globalization.