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China gold reserves may become less mysterious

China gold reserves may become less mysterious

Better statistics link to potential SDR adherence 

by David Marsh

Mon 27 Apr 2015

The world may before long know a little more about China’s hitherto opaque gold reserves  – thanks to complicated manoeuvrings on the renminbi potentially joining the International Monetary Fund’s monetary reserve denominator, the Special Drawing Right, later this year.

As part of diversification of reserves holdings, China over the past five years is widely believed to have amassed gold reserves well above its officially reported total of 1,054 tonnes, a figure which Beijing has maintained unchanged since 2009 in data reported to the IMF. Gold mines in China – the world’s biggest bullion producer for the past eight years, with 2014 output of 452 tonnes - have been quietly selling some of their output to the state, possibly several hundred tonnes in some recent years.

The mystery over Chinese gold purchases has deepened at a time when central banks from other emerging market economies, including Russia, Iraq, Turkey and Kazakhstan, have been overtly buying significant quantities of gold, while those from the developed world have stopped selling, pushing annual reported net central bank gold purchases to around the highest level for 50 years. This is an important reason why the yellow metal’s price has largely remained in the $1,200 to $1,400 an ounce range in the last two years despite the sharp revaluation of the dollar.

The link between gold and the SDR – the IMF’s composite currency unit, comprising the dollar, euro, yen and sterling – resides in China’s potential upgrading of its international statistical reporting as part of a deal under negotiation on becoming the first emerging market economy to join the elite group of reserve currencies. 

There is no formal quid pro quo in discreet bargaining between Beijing and Washington, and nothing has been agreed so far. Yet establishing China’s place at the monetary top table of world monetary powers could be accompanied by relaxation of Beijing’s restrictions on providing the IMF details on its foreign currency and gold holdings.

Among conditions governing a decision on refashioning the SDR, the IMF is examining the renminbi’s much-increased use in world trade and reserves as well as whether it is ‘freely usable’ in international payments and official transactions. One important side-issue is that China may be moving towards modifying its previous non-co-operation with the IMF in providing a confidential currency breakdown of its $3.7tn of foreign exchange reserves.

China enforces reserves secrecy to protect its national interests against what it deems as western competitors, but the country’s  integration into the world economy makes the policy seem outmoded and counterproductive.

The renminbi’s adherence to the SDR would have little immediate practical significance since the unit is not a real currency. But a positive decision would be of great symbolic value to Beijing, reinforcing both its challenge to western dominance of global monetary governance and its new efforts to turn the renminbi into an international hard currency.

China’s last revision to official gold reserves was in April 2009, when the reserves total was raised from just under 600 tonnes, a figure Beijing had maintained unchanged since 2002. China may wish to make an announcement of a new total, of a sufficient magnitude to create a stir on the gold market, at a time when international gold prices are stable or rising.

China’s present reported figure of 1,054 tonnes makes it the seventh biggest official gold holder. Russia overtook China last year as a result of Moscow’s gold buying to reduce its dependence on the dollar. Russia has official holdings of 1,207 tonnes, making up 13% of the state’s overall reserves, against a percentage of just 1% for China.

There has been speculation that China could announce at least a doubling of gold reserves to above 2,000 tonnes, potentially putting it in the same league as the other large gold holders - Germany (No. 2 globally with 3,384 tonnes, well behind the world leader, the US, with 8,134 tonnes), the IMF with 2,814 tonnes, Italy with 2,451 tonnes and France with 2,435 tonnes.

One factor that could embolden the Chinese leadership on the timing of a higher bullion reserves announcement reflects gold’s firmness against other currencies that Beijing also holds, along with the dollar, in its foreign exchange assets, especially the euro – for China, a significant benchmark. As a result of the dollar’s general international strength, gold has risen 28% in euro terms since end-2013, strengthening the logic of China’s behind-the-scenes gold diversification.

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