In Shanghai in July a China International Foreign Exchange Reserve Center is likely to be set up and take charge of investing foreign exchange (forex) in gold assets, Shanghai Securities Journal reported Tuesday. Their source is cited to be with the country’s central bank, the People’s Bank of China.

China is now the largest holder of foreign exchange reserves in the world with nearly US$900 billion in hand. At the end of November 2005, China held US$250 billion US T-bonds, but no official statistics of other US dollar assets have been revealed.

US dollar assets are expected to account for about 70 percent of China’s total reserve, the Beijing-based Economic Observer reported on Monday. Therefore the establishment of an independent forex reserve center is believed to be a move of structural diversification.

Of China’s foreign exchange reserves, US dollar assets are on the decline. Statistics from the US Treasury Department show that US T-bonds held by China in October 2005 stood at US$4.6 billion less than the previous month and accounted for 32 percent of total reserves. But in June 2004 the level of US T-bonds was 41.28 percent -- 9.28 percentage points higher.

The main task of the reserve center is to deal with gold and will not invest in other assets such as metal and oil, said the source at the Shanghai headquarters of the central bank.

It is said that the preparatory work is nearly complete and Liu Xiaochi, now vice director of Reserve Management Department under the State Administration of Foreign Exchange (SAFE), will take charge of the newly-established center. However, the news has not been confirmed.

Despite this, it doesn’t mean that government will increase the proportion of gold assets in foreign exchange reserves.

According to statistics from the central bank, at the end of March 2006 the gold reserves were 19.29 million ounces. In the past 40 months this figure hasn’t changed. The bank increased gold reserves by 3.32 million ounces in December 2001 and 3.12 million ounces in December 2002.

China’s gold reserves are only 1.3 percent of the total foreign exchange reserves, which is well  below the standard 3 to 5 percent adopted by many other countries, according to Liu Shan’en, an expert from the Beijing Gold Economy Development Research Center. The lowering of exchange rates of the US dollar against the Chinese yuan could prompt the government to increase gold reserves, he said.

In Liu’s opinion gold reserves could be lifted to 2,500 tons at most, which is four times higher than the current level.

(China.org.cn by Tang Fuchun, May 27, 2006)