Since April, 2009, when it announced an official gold stock of 1,054 tons, the People’s Bank of China (PBOC) may have tripled its gold stockpile to 3,150 tons as part of China’s long term push to diversify the country’s foreign-exchange reserve and enhance the ability of the yuan to challenge the dominance of the U.S. dollar in global trade.
The latest estimate by Bloomberg Intelligence makes China’s bullion holdings second only to the U.S., which has a stockpile of 8,133.5 tons of gold.
Bart Melek, head of commodity strategy at TD Securities in Toronto, told Bloomberg that China’s boosting of its gold stock is meant to position the yuan in competition with the dollar as a global trade currency.
“If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies. [Gold] is certainly viewed as a viable store of value for an up-and-coming global power.”
Bloomberg says that its estimation of China’s current bullion stock is based on available trade data, domestic output figures, and data obtained from the China Gold Association.
Analysts are challenged to estimate the amount of gold China holds at any time because the authorities release official figures only once every few years.
China, the world’s largest producer of gold, is reforming its centrally-planned economy and pushing to increase gold’s share of its total reserves, estimated at $3.8 trillion, as part of an overall strategy to position the yuan as a global and IMF reserve currency. The Chinese have been working hard to make a case for the yuan to be included in the IMF’s Special Drawing Rights (SDRs) basket, which includes the dollar, euro, pound sterling, and the Japanese yen.
Analysts thus expect that the mist of mystery over the exact amount of China’s bullion holdings would soon lift as the country discloses its current holdings in the bid to have the yuan included in the SDR.
After China became the world’s second largest economy in 2010, the IMF rejected requests for the yuan to be included in the SDR basket, saying that China’s economy and currency were too centrally controlled.
This was a reference to the fact that the Chinese authorities run a largely centrally-planned economy, in which private investors are unable to move their money in and out of the country freely and the value of the yuan is closely controlled by the monetary authorities.
However, the yuan still has a long way to go to catch up with the dollar as a global reserve currency. IMF figures show that the U.S. dollar alone accounts for about 63 percent of global central bank holdings, followed by the euro, which accounts for about 22 percent of total holdings.
Compared with the dollar and euro, in February, the yuan was a dismal seventh on the list of world currencies used for SWIFT payments, after having dropped from fifth position, which it occupied in December, 2014. According to Bloomberg, latest figures from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) show that the U.S. dollar accounted for 43 percent of international payments in February, and the yuan, only 1.8 percent.
This is not the first time that China has increased its bullion stock dramatically. PBOC doubled its stockpile between 2008 and 2009, RT reports. The Chinese hope that diversifying their foreign reserve holdings will ease reliance on the U.S. dollar and boost the standing of the yuan as a currency backed by relatively diversified assets.
China’s boosting of its bullion stocks in recent years coincides with a considerable appreciation in the value of gold, from $882.05 an ounce in 2008 to a peak price of $1,921.17 in 2011. Most of the appreciation was due to investors buying gold in response to currency depreciation and inflation.
But prices gold prices have dropped significantly since 2013 due to the rebound of the U.S. economy and the value of the dollar.
The current trend suggests that the Chinese will not increase their bullion stock considerably. The PBOC’s deputy governor Yi Gang said in 2013 that China was unlikely to invest more than 2 percent of its foreign-exchange holdings in gold.
And of course, the U.S. authorities are watching China’s push to position the yuan in competition with dollar warily. A surge by the yuan as a global currency reserve would adversely affect the stability of the U.S. dollar.