Wednesday 28 Feb 2024
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This article first appeared in The Edge Malaysia Weekly, on November 21 - 27, 2016.


Since 2000, the People’s Bank of China (PBOC) has more than quadrupled its gold reserves to just over 1,800 tonnes. In near-perfect symmetry, the official reserves of the rest of the world, on a net basis, fell by nearly 1,900 tonnes. 

Even with this “transfer”, China’s reserves are far behind the 8,100 tonnes held by the US. But there is evidence to suggest that the Asian giant is keen on growing its bullion hoard.

In the last 30 years, China has gone from producing less than 10 tonnes of gold annually to being the world’s largest gold miner. Measures introduced by its government have included the establishment of a special Gold Mining Unit in the People’s Liberation Army to prospect for the metal and develop mines, according to a report published by the World Gold Council titled China’s Gold Market — Progress and Prospects.

In 2012, Chinese government agencies such as the PBOC, Ministry of Finance, China Securities Regulatory Commission and National Development and Reform Commission, which has broad administrative and planning control over China’s economy, jointly published a national gold strategy. It remains one of the few, if not the only, nationally coordinated strategies for gold.

More recently, in April, the Shanghai Gold Exchange (SGE) launched a renminbi-denominated benchmark price derived from trades conducted by 18 SGE participants in the 1kg gold contract. The new benchmark is viewed as Beijing’s hope to reduce the country’s reliance on US dollar-based prices of the metal. Aram Shishmanian, CEO of the World Gold Council, said in a statement that it was “a stepping stone to a new multi-axis trading market consisting of London, New York and Shanghai and signals the continuing shift in demand from West to East”.

Barely a month later, ICBC Standard Bank acquired Barclays Bank’s London vault, which has a storage capacity of 2,000 tonnes of gold. Then in July, it was widely reported that China’s Silk Road Fund — a US$40 billion investment fund set up to invest in countries along the ancient trade routes of Central Asia — was involved in a multibillion-dollar bid with state-owned China National Gold Group Corp to make a joint offer for Glencore plc’s gold mine in Kazakhstan.

How do we explain China’s obsession with the precious metal?

The answer has much to do with gold’s allure, both as an excellent hedge against inflation and as a safe-haven asset. China has a deeply ingrained fear of inflation due to bouts of hyperinflation in the country’s turbulent past. In fact, for many Chinese, “pure gold” jewellery was the best available proxy for bullion until 2004, when the PBOC authorised the public purchase and sale of gold in bullion form for the first time since 1950.

It also has much to do with China’s plan to make the renminbi a more international and tradeable currency — in effect, a reserve currency. The government took a significant step in this direction last November after the International Monetary Fund added the renminbi to its reserve currency basket. As a result, the influential basket of currencies now includes the renminbi, US dollar, euro, pound sterling and yen when calculating the value of the Special Drawing Rights.

While China wants the renminbi to be a reserve currency, it does not want it to be a strong currency as it would be less appealing to investors and make exports more expensive. The best way to achieve this — to strengthen the renminbi without having it appreciate against other major currencies — is to back it with more gold.

Finally, China has also likely embarked on a gold-buying spree in a bid to diversify its reserves and refrain from increasing its exposure to US dollar assets. While there are alternative reserve currencies, these offer only a partial solution to China’s “diversification dilemma”, particularly as they are no longer seen as either sufficiently “risk-free” (for example, the euro and yen) or sufficiently liquid (for example, the Swiss franc and Australian dollar).

This is a smart move as China still holds more than RM5 trillion in US debt. If we assume that it would like to emulate other countries in terms of a gold-to-currency mix in its reserves of about RM13 trillion, it would need to hold about 10% or about RM1.5 trillion in gold. 

In other words, if China were intent on having 10% of its reserves in gold, it would need to have a holding of about 8,600 tonnes — substantially more than its current holding of 1,800 tonnes. This suggests that the spree will continue.

The implications of this on the gold trade are enormous. Consider this: last year, the gold mining industry only produced 3,165 tonnes of gold and central banks bought a total of 588 tonnes (according to World Gold Council: Gold Demand Trends Q4 2015). If China is intent on meeting its gold holding target, it will have to buy the next two years’ supply of gold or what the world’s central banks bought last year for the next decade.

This is assuming that China only wants to have 10% of its reserves in gold. If it wanted to benchmark its gold holdings against other major economies, it would need to hold about 30% of its reserves in gold. That is 33,600 tonnes or RM5.7 trillion in gold. If this were to happen, then China’s central bank would have to buy every ounce of gold produced for the next 10 years or buy what the world’s central banks bought last year for the next 50 years. In either case, gold will retain its shine.


Robin Lee is founder and CEO of HelloGold. He was previously chief financial officer of the World Gold Council.

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