The People’s Bank of China (PBOC), China’s central bank, holds a vast amount of foreign currency in reserve. At the end of 2012, China’s hoard stood at $3.3 trillion and rising, a 700% increase since 2004 and enough to purchase the gold reserves of every central bank on Earth twice over. China’s reserves are far and away the largest of any central bank.
Most of China’s foreign exchange reserve comes from the country’s huge trade surplus. Global demand for Chinese goods provides a stream of foreign currency into manufacturers and suppliers. Businesses in turn deposit the dollars, euros, pounds or yen in exchange for Chinese yuan, and the foreign notes end up at the People’s Bank of China. China also accumulated foreign currency to maintain the yuan at an artificially low rate of exchange. A low exchange rate keeps the price of Chinese exports low and reinforces trade surpluses. Through 2010, China pegged the renminbi to the dollar. Since then, valuation is tightly controlled within a small range.