China's Rise in the Global Gold Market

05 June 2023 г. 5 minutes of reading

Analysts are closely watching the situation on both sides of the Atlantic, where financial market turmoil is currently underway. At this time, China is taking advantage of the situation to buy large amounts of gold. For the first time in several years, the People's Bank of China released new data on its purchases. This testifies to the desire of the country to declare itself as a decisive player in the global gold market. According to official data, China is now the country with the sixth largest gold reserves in the world.

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While many Central Banks are increasing their gold holdings, the People's Bank of China turned out to be one of the most important buyers at the beginning of 2023. It has acquired significant volumes of the yellow precious metal since the end of 2022. Data from China shows that in April, China increased its gold reserves for the sixth month in a row, the largest gold purchase since September 2019. The country has added a total of more than 100 tons of gold over the past few months, bringing its holdings to more than 2,076 tons, according to official figures.

There are good reasons for this: the growth of geopolitical tensions, especially in Ukraine and Taiwan, the slowdown in economic growth and the country's intention to move towards the de-dollarization of the world. This is evidenced by the numerous trade transactions that China has recently conducted in currencies other than the dollar. So much so that the yuan is now the most widely used currency in China's cross-border transactions. Therefore, gold buying is likely to continue as long as the dollar maintains its hegemony - and this may be a very long time.According to Tom Calandra, former editor-in-chief of financial website MarketWatch, China should "continue to build up its reserves given the slow de-dollarization trend." Between 1999 and 2021, China was the world's second largest buyer of gold, according to the IMF.

On the other hand, the actions of the Central Bank of China go hand in hand with the recovery of the country's economy. Despite some structural weaknesses, industrial production rebounded 5.6% in April and the economy returned to 4.5% growth in the first quarter. According to Wang Lixin, Regional Director of the World Gold Council (WGC) in China, "the recovery of the economy should favor the growth of the overall demand for gold in the country." He said that "Given the geopolitical and financial risks, investors tend to pay more attention to traditional safe havens like gold."

Over the past two decades, China has only sporadically published data on the size of its gold purchases. In particular, the country reported an increase in its reserves in 2016 and 2019, and remained completely silent between 2019 and 2022.

End of silence

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While anonymous purchases of gold are not uncommon among central banks, the Chinese government has used this opportunity for decades to avoid having to disclose the true size of its gold holdings. But since November 2022, the economic and geopolitical context has changed, and since then, China has been openly publishing its data. According to analysts, this can be explained by a very specific purpose. According to Willem Middelkoop, chief investment officer and founder of the Commodity Discovery Fund, "China has started making its purchases public again because the country wants to show the world that it has an international currency." Gold, after all, has always been considered the highest quality currency standard.

How much gold

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2076 tons: is this the real size of China's gold reserves? Most likely no. The opacity of the Chinese leadership is well known to the general public, and in terms of the amount of gold bars that the country owns, it seems especially pronounced. Considering the fact that China is the world's second largest economy, has vast foreign exchange reserves but only a small share of gold reserves (officially 3% of foreign exchange reserves), and has been trying to promote a multipolar world for several years, it has always seemed surprising that the country occupies only sixth place among the largest owners of gold. On the other hand, China is the largest gold importer in the world, as well as the country with the highest gold demand and production. In the 2010s, China accounted for about 15% of global gold production.

The official data is all the more confusing as the Central Bank is buying monetary gold, while a huge number of Chinese investors are buying non-monetary gold. Because all purchases of non-monetary gold are cleared through the Shanghai Gold Exchange (SGE) (where they are accounted for for tax reasons), they are automatically published, unlike other purchases. In 2014, the chairman of the Shanghai Gold Exchange stated that “The People's Bank of China does not buy gold through SGE. Thus, he can easily hide the size of his gold holdings - as well as buy gold in dollars to diversify his reserves (on the SGE, gold is traded in yuan).”

Determining the true volume of gold bars held by the Central Bank of China is not easy. Based on a comparison of numerous studies, the reserves are predicted to be over 4,000 tons, about double the official figure. China can afford to actively intervene in the gold market, since it has run a current account surplus since the 1990s thanks to Deng Xiaoping's economic liberalization measures. Given its economic situation over the past three decades (characterized by a persistent current account surplus) and the circumstances outlined above, it is actually highly unlikely that China's total gold reserves are only around 2,000 tons.

Continue shopping

Against the backdrop of financial panic in the US, gold is trading today near $2,000 per ounce. The banking crisis and growing fears about the growth of the global economy act as key factors in the demand for the "safe precious metal". Central banks have been extremely active in the gold market and added 228 tons to their reserves in the first quarter of this year. This is the highest figure for a similar period in the last 20 years - and this is after the record purchases of 2022!

The current trend should continue as there is no indication that we will be spared further bank failures in the US or Europe. On the contrary, the situation is becoming more and more uncontrollable for the monetary and currency authorities. A new incident can happen at any moment. The scale of the international financial system and concentration in the banking sector have exacerbated the effects of a possible expansion of the crisis.

In this context, the People's Bank of China is looking more than ever to diversify its reserves while remaining low key. The goal is to establish itself as the dominant power in the US-dominated post-World War II system if the international economic system is reformed. Therefore, at many economic forums and conferences in early 2023, they regularly talked about what role China intends to play in the gold market.