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Analysis
China’s gold update may not tell full story

China’s gold update may not tell full story

Announcement on 60% reserve increase linked to IMF review

by David Marsh

Mon 20 Jul 2015

China has lifted a veil over its gold holdings and confirmed its interest in providing more up-to-date reserves data by announcing a near 60% jump in its official bullion assets since 2009.

The declaration on Friday, in a Chinese language announcement on the People’s Bank of China (PBoC) website, appears a judicious attempt to show more statistical transparency as China modernises its international currency arrangements.

In particular, the announcement seems designed to lower potential impediments to a possible decision by the International Monetary Fund to introduce the renminbi into the special drawing right, the IMF’s composite currency unit. The update has been under preparation for several months, as I wrote on 27 April: ‘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 SDR later this year.’

The PBoC said its gold reserves were 1,658 tonnes against 1,054 tonnes in April 2009, which was the last time China declared its gold holdings. In 2009 the reserves total was raised from just under 600 tonnes, a figure Beijing had maintained unchanged since 2002.#

Although China is making greater efforts to meet international standards on presenting its reserves and other sensitive data, it is unlikely that the announcement gives the full story of the PBoC gold reserves. These are believed to include both a foreign component – dollars converted into gold on foreign markets as part of general efforts to diversify reserve assets – as well as a domestic element – in the form of metal acquired from the Chinese mining industry, now the world’s most important in terms of annual output.

Since purchases from domestic suppliers are settled in renminbi, they are logically not thought to be part of foreign reserves. The Chinese central bank’s overall gold holdings may thus in fact be much larger than the reported 1,658 tonnes, in line with estimates that, in some years, it has been purchasing several hundred tonnes of production from Chinese mines.

The Chinese central bank said laconically on Friday. ‘Gold has a special risk-return characteristic, and at specific times is not a bad investment.’

The timing and style of the announcement indicate that the PBoC has been trying to balance a number of considerations.

One important aim is to demonstrate how China remains the world’s sixth largest gold holder, ahead of Russia, which momentarily leapfrogged ahead of China last year as a result of gold purchases made to lower the country’s reliance on the dollar. Russia has official holdings of 1,251 tonnes, making up 13.4% of the state’s overall reserves, according to the World Gold Council, against just 1.6% for China, based on the latest PBoC gold figure and the end-June foreign exchange holdings of $3.7tn.

Another objective is to avoid unduly disturbing the gold market at a delicate time for the dollar ahead of a probable US interest rate rise later this year. If China had met some analysts’ expectations of a bullion total of between 2,000 and 3,000 tonnes, that would have had a major impact on the bullion market, something Beijing may wish to avoid in the months leading to conclusion of the SDR review.

As it is, news that China’s official buying has been at the lower end of expectations came as the price of gold, under pressure because of the dollar’s firmness, fell on Friday to its lowest level in five years.

Confirmation of Chinese gold purchases comes 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.

In China’s effort to join the SDR, there is no formal quid pro quo over data transparency in discreet bargaining between Beijing and Washington. Yet establishing China’s place at the top table of world monetary powers naturally requires some relaxation of Beijing’s restrictions on declaring its foreign currency and gold holdings. China has now made an important step in this direction, without fully submitting to a growing feeling that China should substantially tone down its traditional secrecy on reserves.

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