In the past couple of years, China has enacted a series of steps for enhancing the yuan’s global role. It is allowing companies and official bodies greater leeway in holding the currency both onshore and offshore and using it for borrowing and trade settlement. In the latest shift, it is allowing domestic companies to move yuan offshore for investment purposes.
The move comes as the People’s Bank of China is allowing a controlled upward move of the yuan in response to repeated U.S. concerns that the currency is undervalued.
This, for China, is the Achilles’ heel: If the world monetary system is outdated, then shouldn’t the People’s Bank be lowering the volume of reserves held in dollars?
China remains officially tight-lipped about the proportion of reserves held in the greenback. China’s foreign-exchange reserves rose to a record $2.85 trillion by the end of last year, an 18.7% year-on-year increase and $199 billion more than the nearly $2.65 trillion held by the end of September, according to the latest information from the People’s Bank. Yi Gang, vice governor and head of the State Administration of Foreign Exchange (SAFE), has admitted in the official media that the reserves increase would increasingly challenge China’s asset management.
No wonder China has stepped up its verbal intervention in favor of the euro.
Officially, the proportion of reserves held in dollars is a state secret. There seems, however, to be increasing awareness that maintaining this opacity doesn’t make much sense. We know, courtesy of Reuters, that China Securities Journal, an official newspaper, citing unnamed reserve managers, said last fall that the reserves composition is what was described as the global average: 65% in dollars, 26% in euros, 5% in pounds and 3% in yen.
China could make a further step in the direction of openness by communicating the currency reserve breakdown to the International Monetary Fund. The IMF’s overall figures, in a statistical series known as “Cofer,” are realized quarterly. But because Chinese reserves are not included in the statistics, the Cofer figures look increasingly askew. The IMF’s latest release, at the end of December, stated that overall world foreign-exchange reserves at the end of September 2010 totaled just less than $8.9 trillion against $8.4 trillion at the end of the second quarter and just under $7.9 trillion a year earlier.
However, the “allocated reserves” — basically the reserves for which the IMF has access to a currency breakdown, not including China and some other mainly developing countries — were “only” $4.99 trillion — leaving a $4 trillion “black hole” of unallocated reserves that now makes up 55% of the total. Of the “allocated reserves,” $3.06 trillion, or 61%, are in dollars, and $1.35 trillion, or 27%, are in euros, according to the IMF.