Is China increasing its gold reserves to make Yuan a reserved currency?

Is China increasing its gold reserves to make Yuan a reserved currency?

China will be boosting its gold reserves as the precious yellow metal only makes up a small share of its FOREX holdings. The country has yet to make an announcement on how much gold it will have in total after increasing its reserves.

China may have the most FOREX reserves in the world, amounting to $4 trillion as of the second quarter of this year, but its gold accounts to only 1.1% of the total. Germany, the world’s second largest gold holder, has around 70%. In January 2013, Germany made the headlines when it decided to repatriate some of its gold from the U.S. Fed back to Bundesbank. In an editorial penned by gold investment and price monitoring site BullionVault, it was clear that Germany’s vast precious metal reserves are for economic stability purposes in case of inflation or invasion. China, on the other hand, is buying gold not only to make up for its small share but may also be boosting its reserves in order to position the Yuan as a reserved currency.

“It is clear that western central banks over time will be reducing their reserves and China and other Asian countries will be increasing,” said David Marsh, the managing director of the Official Monetary and Financial Institutions Forum. “Gold will become more traded amongst central banks in the next 30 years because there are colossal imbalances in world gold holdings as a percentage of overall asset reserves.”

In 2013, Marsh also commented on China’s gold buying. He said, “It is likely that the Chinese authorities will carry on purchasing gold in modest amounts and they will do it in a way calculated not to disturb the market.” His comments were about the country’s reserve diversification, adding that “there’s no reason why the Chinese central bank should hold a disproportionate amount of other countries’ reserve currencies such as the dollar.”

Just recently, the UK treasury has announced that it will be issuing its first Renminbi-denominated bond in hopes of giving the Renminbi more exposure to the global market. Today, the Exchange Equalization Account only has Dollars, Euros, and Yen as its reserve assets. However the Swiss National Bank and the Australian Reserve Bank has long recognized the Renminbi and holds it as part of their reserve assets.

The developments of China’s gold buying spree will be interesting to watch, what with the “sleeping giant” making aggressive moves to change the global market. In May, it was reported that China is actually looking to be a major player in the pricing of gold with its very own International Shanghai Gold Exchange. The People’s Bank of China has already given the Shanghai Gold Exchange the green light to create an international gold-trading platform, and has invited several foreign banks to participate including HSBC, Standard Bank, ANZ, Standard Chartered, and the Bank of Nova Scotia.

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