UPDATE February 18, 2016: China’s Foreign Exchange Reserves Dwindling
Prior to the IMFs meeting in Lima, Peru in October the IMF agreed China could re-approach the discussion in October 2016. Instead, yesterday IMF Approves China Inclusion in SDR (the basket of currencies known as Special Drawing Rights). You can read more about the SDR here.
5 Things You Should Know about IMF Approval of China in SDR
- China Clearly meets the criteria on global trade: @13% of global GDP and 13% of currency transactions.
- Currently, they don’t have a freely tradeable currency that is widely used. While China has a widely used currency as of today it is still subject to capital account restrictions.
- Have a liquid capital market (bond market statistics and plans for issuance are here
- A Central Bank balance sheet must be able to provide instant liquidity when needed
- A Central Bank’s balance sheet also needs to have an amount of gold, which is designated by the IMF and scaled to the size of the countries economy. Goldman Sachs did a great peice on China’s Gold Holdings which you can read here.
- In addition to gold & currency, reserve status is typically conferred to countries with active bond markets in their home currency as well as the currency of their trading partners.
- China China is planning at least 1 trillion yuan ($161 billion) in bonds, and potentially a multiple of that, to fund construction projects that can help address a struggling economy, according to people familiar with the matter.
Disclosure of Gold Deposits
China hadn’t formally disclosed their gold reserves (see China’s Gold Reserves data here) but they clearly had more than enough gold to meet the IMF requirements this year and continue to accumulate.
Gold Reserves are country’s gold assets held by the central bank. They are intended to be used to pay off depositors in times of crisis. as paper money became more prevalent and accepted as “legal tender”, a countries gold reserves became more important operationally as the currency was no longer backed by the metal. World Official Gold Statistics as of February 2015, published by the World Gold Council can be found here.
The Trans-Pacific Partnership (TPP)
The Trans Pacific Partnership (TPP) and the 12 countries included met on October 4, 2015, Ministers of the 12 Trans–Pacific Partnership(TPP) countries:
You can read more about the TPP and familiarize yourself with this trade group using the following resources:
Quite a few moving parts! I think IMF’s announcement now will help firms prepare themselves and China can prepare itself for a completely open currency market, greater bond issuance, etc.