China’s continuous hike of gold reserves demonstrates diversification efforts

By Wang Jiamei Source:Global Times Published: 2019/7/9 21:18:40

Illustration: Luo Xuan/GT

China increased its gold reserves for the seventh month in June, taking its total reserves to 61.94 million ounces, up 330,000 ounces compared to the previous month, data from the central bank showed on Monday. As gold is considered to be a typical safe haven asset, China's gold purchases are generally seen as a strategic measure to hedge against risks and uncertainties related to the international payment environment and its own currency.

Meanwhile, official data also showed that China's foreign exchange reserves stood at $3.12 trillion by the end of June, up $18.23 billion compared with the previous month. While China's holdings of gold only make up a small percentage of its total foreign exchange reserves, the increases in both gold reserves and foreign exchange reserves bode well in terms of China's capability to stabilize its currency's exchange rate and for handling any potential economic storm.

Historically speaking, it has not been common to see the People's Bank of China (PBC) increase gold holdings for seven consecutive months. China's gold reserves have increased by 2.7 million ounces from 59.24 million ounces at the end of November 2018.

As to the reasons behind the continuous gain in China's holdings of the precious metal, diversification and optimization of reserve assets could be the main factor. Against the background of the trade war with the US, China has shown signs of a steady retreat from dollar-denominated assets, a phenomenon called "de-dollarization"that indicates a shift from US dollar-based assets. According to data released by the US Treasury Department in June, the Chinese holdings of US Treasury bonds and notes declined for a second straight month in April, falling to $1.113 trillion, the lowest level in nearly two years. While China remains the largest non-US holder of treasuries, the continuous decrease in its treasury holdings, plus its increased gold reserves, highlight the country's pursuit of de-dollarization amid the uncertain outlook for global trade and the world economy as a whole.

This de-dollarization process hasn't only been seen in China. In fact, major central banks in countries like Russia and Japan have been cutting back on their treasury holdings. For example, Russia has already slashed nearly 85 percent of its treasury holdings from $96.9 billion in January 2018. 

In the meantime, global central banks have been buying gold for their reserves in recent years. Countries like Russia, Kazakhstan and Turkey have been among the most consistent buyers, while relatively inactive central banks like those in Poland, Hungary and India have also returned to the gold market after a multi-year absence. According to data from the World Gold Council, the gold reserves of central banks around the world soared by 651.5 tons, or 74 percent year-on-year, in 2018.

The growing interest in gold has precipitated a continuous rise in the price of the precious metal. Spot gold prices hit $1,422.85 in late June, the highest point in more than six years. The month of June saw gold prices rally more than 8 percent, making it the best monthly performance since 2016.

Observers have attributed the recent gain in gold prices to expectations for an imminent interest rate cut by the US Federal Reserve. While the Fed has repeatedly pledged to "act as appropriate" to sustain the US' economic expansion, the market is now generally convinced that there will be a rate cut in July. Once the Fed cuts the rate, it will inevitably weigh on the dollar and other dollar-based assets.

From the perspective of central banks in China and other countries, the recent increased purchases of gold could also be seen as a means of preserving the value of their foreign exchange reserves ahead of the depreciation of the US dollar.

Moreover, it should be noted that despite the recent gain in gold reserves, China's total gold reserves are not very high compared with other major economies. At present, China holds the world's sixth-largest gold reserves, behind the US, Germany, Italy, France and Russia.

Historical experience indicates that it is a necessary strategic choice to have a certain amount of gold reserves during difficult times for global trade and monetary systems. Sufficient gold reserves are not only essential for countries to guard against future emergencies and to deal with uncertainties in the international payment environment; it is also crucial for measuring the government's capability to maintain its currency stability amid economic concerns.

In this sense, considering the uncertain prospects for the trade war and the world economy, China is expected to continue its purchases of gold in the near future.

The author is a reporter with the Global Times.


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