How much gold does China really have?
The short answer is we don’t really know.
Officially, the Chinese central bank’s reserves stand at 1,842.6 tons. But the People’s Bank of China has not announced an increase in its gold hoard since October 2016. But it has almost certainly added gold to its reserves since then. Just how much is anybody’s guess.
The Chinese have a history of going long periods without any official announcement of its gold holding and then suddenly revealing a large increase in its reserves. In 2009, the People’s Bank of China stopped reporting its gold holdings. Then in June 2015, the Chinese central bank suddenly announced its gold hoard had grown by 57%.
For a little more than a year, the PBOC regularly announced additions to its gold reserves. Chinese gold holdings rose another 185 tons over the next 16 months before it suddenly went silent again. During this time period, China was pushing for inclusion of the yuan in International Monetary Fund’s benchmark currency basket.
Over the last year, a number of central banks have been aggressively buying gold. On net, central banks purchased 148.4 tons of the yellow metal in Q3. That was 22% higher year-on-year and the highest level of quarterly demand since Q4 2014. Russia, Turkey and Kazakhstan accounted for the lion’s share of purchase, but we even saw increases in gold reserves from two EU banks – Hungary and Poland.
But what about China? Is it really sitting on the sidelines? Probably not. And there are some good indications that the Chinese stock of gold is growing as well.
In the first place, China ranks as the largest gold producer in the world and virtually all of that metal stays within the country. According to MoneyWeek, last year, the Chinese mined 430 tons of gold, accounting for about 15% of global gold production. As the MoneyWeek report put it, “Here’s the thing: China keeps all of the gold it mines. It does not sell a single ounce abroad.”
It’s almost certain that some of that gold ends up in the vaults of the People’s Bank of China.
China has also ramped up gold imports. In 2014, the country overtook India to become the world’s largest importer of the yellow metal. The Chinese buy goldfrom Hong Kong, Switzerland, London, Australia and Singapore. It’s difficult to precisely track the amount of gold flowing into China as many of the trades are over the counter. But Hong Kong does issue fairly reliable reports. Based on MoneyWeek’s analysis, between gold production and Hong Kong imports China has accumulated over 10,000 tons of gold since 2000.
“Meanwhile, all the gold that enters China must be sold via the Shanghai Gold Exchange (SGE), and it is possible to get numbers for SGE withdrawals since 2008. These take the grand total of imports and production to 14,111 tons.”
So, how much of that gold does the Chinese government actually hold? Obviously, the central bank doesn’t end up with all of that metal. Private investors in China hold a lot of that gold.
“Quite how much is falling into domestic hands is hard to quantify, but Bron Suchecki of the Perth Mint, studying gold flows, argues that China aims for private citizens to accumulate 55% of flow – with the remaining 45% going to commercial banks and the Chinese central bank. Even if half of that 45% goes to the PBOC, then their holdings are likely to be higher than the stated 1,842 ounces.”
And as Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE).
The bottom line is the actual number remains a mystery. Sharps Pixley CEO Ross Norman told MoneyWeek that the number is “obfuscated and unknown.”
“The PBOC’s figures can be whatever they want them to be. In all probability, it’s much higher than officially stated. My guess is that they gave that figure of 1,842 tonnes to be high enough to get credibility with the IMF to satisfy its criteria to be included in SDRs (the IMF’s international currency basket), but not so high as to issue any kind of challenge to the US.”
Why do the Chinese want to hold gold and what’s the big secret? It all comes down to economic power. In other words, the Chinese do want to challenge the US — just not directly — at least not right now.
Gold offers countries some measure of independence from the US dollar. That means more political and economic independence and stability. Gold could even play a key role in a strategy to dethrone the greenback. Given the political dynamics and the escalating trade war, it seems unlikely the Chinese suddenly stopped increasing their gold reserves in 2016.
As we’ve been reporting over the last year, gold appears to be a big part of Russian and Chinese plans for economic independence by shifting away from dollar-based trade. Given that backdrop, it seems highly unlikely that the Chinese are not adding to their gold holdings. In fact, they are probably aggressively buying gold, despite what they are telling us.