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Of gold reserves, US dollars, yuan and a new global currency
By Sean Maguire |
May 8, 2009, Friday
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Print Edition
Print Edition
GOLD prices leapt with the recent announcement by the Chinese government of an increase in its gold reserves to 1,054 tons.
The disclosure - an IMF requirement - caused a general reappraisal of gold's relevance as a reserve asset by central bankers.
The Chinese government is not in the habit of releasing figures detailing its gold reserves - the last time such figures were disclosed was in 2003 when holdings stood at 600 tons.
The rise in gold holdings is substantial. Though this figure represents a 76 percent increase and places China fifth in the list of gold holding nations, it is worth noting that this rise has been spread out over a period of six years.
Moreover, gold holdings represent only 1.5 percent of China's foreign exchange reserves in comparison with some European banks that hold 50 to 60 percent of their foreign exchange reserves as gold.
As a tidal wave of greenbacks looks set to come crashing into the US economy bringing searing inflation in its wake, Beijing has been steadily acquiring gold as a hedge against eventual dollar decline.
And the Chinese government is pushing hard to put the dollar out of its misery as the currency of international trade.
China has already negotiated currency swap deals for bilateral trade with Argentina, Malaysia, South Korea, Belarus and Indonesia as a way of unblocking trade finance and presenting the renminbi (yuan) as an acceptable alternative to the US dollar.
Putting further pressure on the US dollar was the decision at the end G20 summit to grant the IMF US$1 trillion in extra funding with a view to resurrecting the idea of its Special Drawing Rights (SDRs).
SDRs were launched in 1969 when the US dollar was attached to gold as a new international reserve asset class to assist liquidity. They are a supplement - or an alternative - to the US dollar for trade purposes. SDRs are, in effect, a de facto global currency outside the control of any sovereign nation.
Under the IMF constitution, the value of SDRs is fixed according to a basket of four currencies (The US dollar, the euro, the yen and the British pound).
The weighting is determined by the level of exports and the reserves of currency concerned held by IMF members.
The impact on the remnimbi of this new form of international liquidity will be determined largely by whether it is included in the basket of currencies and with what weighting.
The Russian government has proposed regional baskets of currencies so that the central SDR basket could be comprised of a number of regional baskets, each in turn including various local currencies.
However, the role of reserve currency puts upward pressure on the exchange rate by increasing demand for that currency.
For net importers, this is good news, but for net exporters it is a threat to growth as exports get priced out of foreign markets, as China and Japan have already experienced.
There are a number of problems, both political and economic, associated with SDRs but they may represent a temporary palliative to world trade anxieties.
The move away from the US dollar and towards a basket of currencies and perhaps gold as a new international reserve currency - not itself an entirely unproblematic scenario - is the likely outcome.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His e-mail: sbmaguire@allbrightlaw.com.)
The disclosure - an IMF requirement - caused a general reappraisal of gold's relevance as a reserve asset by central bankers.
The Chinese government is not in the habit of releasing figures detailing its gold reserves - the last time such figures were disclosed was in 2003 when holdings stood at 600 tons.
The rise in gold holdings is substantial. Though this figure represents a 76 percent increase and places China fifth in the list of gold holding nations, it is worth noting that this rise has been spread out over a period of six years.
Moreover, gold holdings represent only 1.5 percent of China's foreign exchange reserves in comparison with some European banks that hold 50 to 60 percent of their foreign exchange reserves as gold.
As a tidal wave of greenbacks looks set to come crashing into the US economy bringing searing inflation in its wake, Beijing has been steadily acquiring gold as a hedge against eventual dollar decline.
And the Chinese government is pushing hard to put the dollar out of its misery as the currency of international trade.
China has already negotiated currency swap deals for bilateral trade with Argentina, Malaysia, South Korea, Belarus and Indonesia as a way of unblocking trade finance and presenting the renminbi (yuan) as an acceptable alternative to the US dollar.
Putting further pressure on the US dollar was the decision at the end G20 summit to grant the IMF US$1 trillion in extra funding with a view to resurrecting the idea of its Special Drawing Rights (SDRs).
SDRs were launched in 1969 when the US dollar was attached to gold as a new international reserve asset class to assist liquidity. They are a supplement - or an alternative - to the US dollar for trade purposes. SDRs are, in effect, a de facto global currency outside the control of any sovereign nation.
Under the IMF constitution, the value of SDRs is fixed according to a basket of four currencies (The US dollar, the euro, the yen and the British pound).
The weighting is determined by the level of exports and the reserves of currency concerned held by IMF members.
The impact on the remnimbi of this new form of international liquidity will be determined largely by whether it is included in the basket of currencies and with what weighting.
The Russian government has proposed regional baskets of currencies so that the central SDR basket could be comprised of a number of regional baskets, each in turn including various local currencies.
However, the role of reserve currency puts upward pressure on the exchange rate by increasing demand for that currency.
For net importers, this is good news, but for net exporters it is a threat to growth as exports get priced out of foreign markets, as China and Japan have already experienced.
There are a number of problems, both political and economic, associated with SDRs but they may represent a temporary palliative to world trade anxieties.
The move away from the US dollar and towards a basket of currencies and perhaps gold as a new international reserve currency - not itself an entirely unproblematic scenario - is the likely outcome.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His e-mail: sbmaguire@allbrightlaw.com.)
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