The State Administration of Foreign Exchange (SAFE) has announced that China’s gold reserves now equal 1054 tons, grabbing the market’s attention and showing that China is beginning to increase its gold reserve as its long-term strategy, not only as an important tool to hedge USD risk, but also to bolster RMB’s globalization with its increased gold reserve.
SAFE Director Hu Xiaodong said during a recent interview that China was gradually increasing its gold reserve by purifying domestic gold and purchasing on the domestic market.
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The People’s Bank of China (PBoC), China’s central bank, has bought gold on the domestic market with RMB instead of on the world market with its foreign exchange reserve. On its balance sheet, the relevant asset and liability accounts are "currency gold" and "fund for gold purchasing," respectively.
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According to the IMF, after China reports its change in gold reserve and receives recognition from the IMF, its currency gold will become gold reserve.
Li Yang, director of the Institute of Finance & Banking, Chinese Academy of Social Sciences, says China’s gold reserve increase is a long-term trend, and that China will increase its holdings of gold slowly to try to avoid triggering market fluctuation. He added that the "Gold reserve is a sign of confidence for RMB’s globalization," said Li Yang.
Due to the small capacity of the international gold market, China dare not buy in gold reserve from the international market for fear of greatly influencing the international gold price, increasing China’s costs in gold purchasing, and setting itself up for wide criticism from the international financial market.
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Still, international and domestic markets reacted quickly to the news. The gold spot price on the London Gold Exchange rose from about $905 per ounce to $912.5 per ounce between 11:30 am and 12:30 pm on Friday and closed at $913.15 per ounce. On the domestic stock market, shares of gold companies rose steeply on Friday afternoon.
How Much Gold Should China Buy?
A PBoC insider told China Business News that the central bank has not determined a proper scale for the gold reserve, though a PBoC research team suggests it should change some of its foreign exchange reserve into gold reserve at a proper time.
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A PBoC senior official close to the policy-making circle recently suggested that China should formulate a long-term plan and constantly and secretly increase its gold holdings, claiming that at present the percentage of gold in China’s total reserve was too low. According to his suggestion, PBoC should try to buy as much gold as possible from China’s annual gold output of almost 300 tons, while the gold needed by industries and residents could be imported. He also suggests the government buy in gold continuously within a preset price range.
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Some experts believe China should establish a gold reserve system involving gold mines, central bank gold reserves, and private gold holdings. China should restrain foreign capital from controlling China’s gold mines. Quite a few mining companies from Australia, Canada, and South Africa now have shares in China’s gold mines. China should also open more channels for gold import besides financial institutions.
Value of Gold
Those suggesting the government increase its gold reserve all believe there will be drastic fluctuation in major currency exchange rates in the near future. Under such circumstance, gold may function as currency and help to avoid exchange losses.
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Peter McGuire, general manager of the Australia-based Commodity　Warrants　Australia, said if he had $2 trillion of US government bonds, he would hope to lay in some hedging. As China has little faith in USD, it was increasing its gold reserve.
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There have been disputes among scholars and in the market about whether China’s government should increase its gold reserve, but the financial crisis has amplified the voice of increase. At the beginning of January 2009, Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said that for China strategic resources, such as petroleum, would be much safer than USD.
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The US gold reserve totaled 8133.5 tons in September 2008, accounting for 76.5% of its total forex reserves. The ECB’s 533.6 tons and Japan’s 765.2 tons, respectively, accounted for 20.1% and 1.9% of total forex reserves of each. China’s holdings of 1054 ton of gold make up about 1% of its total forex reserves.
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