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LAWRIE WILLIAMS: China’s Cynical Gold Reserve Increase?

At long last, after over 2 years of reporting zero monthly increases in its gold reserves, the Chinese central bank has announced a reserve rise in December of 9.95 tonnes.  While the amount of the increase may be reasonably realistic we do not think that the announced rise is in any way confirmation of the zero increases over the preceding 26 months, but a perhaps cynical ploy to try and convince doubters that the zero increase announcements were, in fact, genuine.  We still doubt that they were given the bank’s long track record of reporting no rises in its gold reserves and then reporting huge increases at five or six year intervals.  These massive gold reserve rises have very obviously been built up over the periods  when the country has been adamant that its reserves are not being increased.  From China’s viewpoint the additional amounts have been held in accounts which it feels do not need to be reported to the IMF until they are transferred into the country’s official forex holding accounts.

As the world’s largest producer of gold, and a non-exporter of the precious metal, China certainly has the opportunity to build up its gold reserves surreptitiously.  This may account, in part at least, for the large discrepancy in estimates by the major consultancies, who provide global gold statistics, between China’s gold consumption and the known total of gold imports plus the country’s own gold output.

There have been numerous instances of Chinese officials and academics suggesting that China should control a gold reserve on a par with that of the USA’s reported 8,133.5 tonnes, but even with the latest announced addition the amount of gold officially reported as being held by China in its forex reserves totals only some 1,852 tonnes - a total not only exceeded by the USA, but also by Germany. Italy, France and Russia - the latter having been raising its own gold reserve figure at a rate of over 200 tonnes a year to its current 2,066.2 tonnes putting it in 5th place among national gold holders - and with France (No. 4 with 2,436 tonnes) firmly in its sights.  China’s ‘official’ holding puts it in sixth place, but many observers, including ourselves, are on record as suggesting the nation’s true gold reserve is substantially higher than the amount it reports to the IMF.

In addition to the statements by Chinese officials and academics which suggest that the country’s gold reserve target may well be far higher than the officially reported amounts there is also plenty of unsubstantiated anecdotal evidence that the country’s reserves and imports are far higher than the reported figures may suggest.

So why should China misreport the true size of its gold reserves? There seem to be two main reasons of which the main one appears to be that there is a belief in China - and some other countries, notably Russia - that gold will play an increasingly important role in any financial reset in the years ahead.  But perhaps not for some years yet..

The other reason relates indirectly to the first in that if the true size of China’s holdings were known it would have a big positive impact on the gold price and make China’s gold purchase programme much more expensive.  This also, if accurate, implies that China may still have some way to go in meeting its reserve targets.

10 Jan 2019 | Categories: Gold, China

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