| China's gold
reserves some years ago became public knowledge when their size was
divulged to the IMF. The Chinese authorities now announce this figure on a
monthly basis.
In 2000-2001 gold reserves remained at
just under 13 million ounces, then rose to just over 16 million ounces at
end-2001 and 19 million ounces at end-2002.
They remained at this level until April
2009, when the Chinese authorities started what may turn out to be a much
larger volume of gold purchases. In that month, gold reserves rose to just
under 34 million ounces, an unprecedented rise of 75.7%. This is
reportedly the result of government purchases of domestic Chinese gold
output to compensate for a fall in demand for gold jewellery, which may
help explain why the international gold price was not pushed much higher.
The State-owned Assets Supervision and
Administration Commission (SASAC) has disclosed that a team of experts set
up a task force in 2008 to study the issue of gold reserves. The team has
reportedly been considering very large gold purchases over the next 8 to
10 years, but has not been able to reach a unanimous decision on this.
Like other countries, China has hitherto
kept only a minute proportion of its external reserves in the form of gold
because gold does not generate income and its value tends to fluctuate
wildly so that there is no guarantee of being able to recoup the original
investment if a government is forced to sell gold.
China's foreign exchange reserves are
largely held in low-yielding US dollar treasury bonds. These have recently
been losing their value as the dollar has trended downward. But if China
were to attempt to stop further losses by selling these bonds their value
would fall even faster.
So diversifying China's exchange reserves
into other currencies and asset classes is likely to be done not by
switching large chunks of dollar-denominated Treasurys into these
alternative investments but by gradual purchases financed by future
inflows.
Mistrust of foreign currencies and fear
of both renewed recession and stimulus-fuelled inflation are likely to
motivate China to play safe by increasing its holdings of physical gold.
These purchases will probably be in small steps to avoid pushing up the
price too rapidly.
|
