LAWRIE WILLIAMS: China still building gold reserves, running down forex
As the Chinese New Year begins, China is continuing to build its gold reserves at a similar rate to the last six months of last year. In January it added just over 16 more tonnes to its gold reserve total bringing the official figure to 1,778 tonnes as is being reported to the IMF. Whether this is a true total or not remains open to doubt given the nation’s history of concealing its full gold reserve position. If the current rate of purchase continues, and we see no reason why it is likely to be cut back given the nation’s view on the importance of gold in the probably inevitable forthcoming global financial reboot, the country will add another 200 tonnes to its gold reserves this year.
Is this the true position? In the past China has hidden gold from it being reported to the IMF in separate accounts and only announced new total gold reserve figures when it has suited it to do so, but whether even these are the true position is obviously still open to doubt. Also, gold consultancy GFMS’s latest Quarterly update suggests that Chinese commercial banks, which are state owned, had built up internal gold holdings of some 1,900 tonnes by the first half of 2015 (and this may well have expanded to around 2,000 tonnes by the year end given the strength of Shanghai Gold Exchange withdrawals which totalled 2,596 tonnes in 2015. This SGE withdrawals figure is hugely higher than the less than 1,000 tonnes GFMS rates as Chinese gold ‘consumption’, yet this gold has to be going somewhere and commercial bank vaults could well account for much of the difference. Could this be being held on behalf of the government.so that would put China’s true gold reserve position at around 3,800 tonnes – much closer to many Western analysts’ estimates of China’s real gold holdings.
Indeed if China is also using other government accounts in which to hold some of its gold, as it has in the past, the total could be far higher. All this is pure speculation on our part – we don’t know, but it would fit in with the big gold inflows which are apparent from Western nation and Hong Kong reported gold export statistics for mainland China, plus China’s own domestic gold output estimated by GFMS at just over 450 tonnes last year. Together these known gold flows into China come to around 2,000 tonnes last year – more than double the GFMS ‘consumption’ estimates – and there are also likely direct gold imports from other sources which we don’t know about.
One other point which has arisen from China’s latest gold and forex reserve stats is that the latter fell by a further $98.46 billion in December – continuing the sharp forex reserve downtrend which has been ongoing since early 2014. Even so this is something of a drop in the ocean compared with the nation’s massive total forex reserve position of $3.23 TRILLION. Much of this drop in reserves has been due to China’s perceived need to defend the yuan parity with the dollar to preserve domestic and area confidence in China’s economic state – albeit it is also combining this with a slow managed depreciation of the yuan too. A side effect of course is that its enormous holdings of US Treasuries are also being depleted too – perhaps rather faster than the overall downturn in forex reserves might suggest.