China could match U.S. gold reserves inside 10 years – or earlier

More analysis suggesting that China is building its gold reserves and at the current rate of growth could match the U.S. gold reserve position in ten years, but is this the whole story?

Since writing a recent article suggesting that China’s Reserve Bank, the Peoples Bank of China (PBOC), has been building up its gold holdings, but without reporting this to the IMF (see: China’s gold appetite key price driver – Nichols, Klapwijk) we have been contacted by a Bloomberg research analyst, Andrew Cosgrove, who has, with his colleague Kenneth Hoffmann, been working on Chinese gold data, and who has come up with a somewhat similar conclusion.  In this case some specific figures have been developed in the research which do tie in well with Philip Klapwijk’s assertion that China has taken some 300 tonnes of gold into reserves in the first half of the current year.

The Bloomberg data, which has been available on Bloomberg terminals since mid October, puts a more precise figure on this, suggesting that in the current year the PBOC will likely add some 620 tonnes into its gold reserves, and possibly even more next given the current lower gold price.  China can do this without reporting the increase to the IMF by the simple mechanism of holding the newly acquired gold in a separate account from its official reserves and only transferring it into the official reserve when it deems it timely, or politically expedient, to do so.  This is exactly what happened in 2009 when China announced an increase in its gold reserve from 600 tonnes to 1,054 tonnes with the gold having been acquired over the prior five years.

It thus seems increasingly likely that China has been steadily accumulating gold since its last gold reserve announcement, but again not reporting the figures – indeed even denying that it has been doing so – surely a question of interpretation if it is working in the same manner as in the five years prior to its 2009 reserve update?  However, there is plenty of Chinese domestic evidence that it may indeed be increasing its reserves, not least a number of statements from Chinese officials and academics calling for official gold holdings in line with the size of the country’s growing economy – and in China few such statements are made without government approval.

In particular, Bloomberg notes the recent call in an editorial on state-run Chinese news agency, Xinhua, calling for a ‘de-Americanized world’.  Amidst some scathing comment on what the writer referred to as a hypocritical nation, the following paragraph is perhaps considered as particularly pertinent in relation to China’s believed interest in building its gold holdings: What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”

Why should this be pertinent to China’s gold holdings?  It is felt by the Chinese, and many others, that  a strong national gold holding, perhaps even matching or exceeding that of the U.S.’s official 8,133.5 tonnes, would put the yuan in a particularly strong position to be at least a part of any new global reserve currency which may be set up, even if not replacing the dollar altogether.  Indeed the Bloomberg research suggests that at the current accumulation rate it would take China only ten years to bring its gold holdings up to the U.S. level – indeed some observers think this could be done even more rapidly and that it may be over half way there already.

China, though, is in the early stages of a new Presidency which could indicate some significant movements in policy.  President, and Chinese Communist Party General Secretary*, Xi Jinping, who has now been President since March this year, seems to be emphasising, inter alia, a focus on markets, and it is certainly possible that the recent anti-American comment on Xinhua, and on a new global reserve currency, may indicate the way China, and its President, are thinking.  President Xi may well be keen to build a legacy and dominance in gold holdings, and a ‘de- Americanized’ global reserve currency, could be relatively simple to achieve as a part of this within his period of Presidency which could last for two five year terms. 

There is little doubt that the country, with its enormous current account surplus, could increase its gold holdings far faster than the analyses noted above would suggest.  Particularly so if it does indeed see its position in gold as being key to its global financial position with an emphasis in setting up a global reserve currency which is dominated by the yuan.  Indeed, China may already have been building its reserves at a greater rate than suggested above.  It is not exactly transparent on reporting gold imports – only those coming in through Hong Kong are quantified – and is more than capable of hiding the true situation as it has done with its gold reserve reporting in the past.

*Note:  While the position of President is largely ceremonial in the Chinese constitution, the true power lies with the General Secretary of the Chinese Communist Party.  In practice, however, the post of President is now reserved for the current General Secretary, whose name is the only one that appears on the ballot for President.


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