LAWRIE WILLIAMS: China's Govt controlled gold reserves already 4,500 tonnes plus

I speculated her back in February in an article entitled China still building gold reserves, running down forex that holdings of gold by Chinese commercial banks perhaps could be considered as part of the nation’s total gold reserve.  The banks are effectively state-owned and would thus likely be subject to their assets being utilised on behalf of the government if required.  I hadn’t seen anyone else bring this particular theory up and assumed the idea had been ignored by analysts and other media, but earlier today at Bloomberg’s Precious Metals Forum in London, not only was there an estimate given of the total amount of gold held by the Chinese commercial banks (a very big number indeed), but also the agreement in a panel discussion between two top China gold experts that, in extremis, the Chinese government could take the banks’ gold reserves into its own gold hoard.  This would put a different complexion on China’s known gold holdings available to the government, and also helps account for some of the huge anomalies between China’s assumed gold 'consumption' (by the jewelry, investment and industrial sectors) and the sum total of known mainland Chinese gold imports and its domestic production which is hugely higher. 

To go back to the original article linked above I raised this particular anomaly thus: ‘...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?'  At the time known Chinese gold imports alone were running at around 1,400 tonnes or more and domestic gold production around 450 tonnes so the two figures combined left a huge gap between GFMS’s estimated consumption figure and known gold flows into China.

Back in February it appears that the figure quioted then may have significantly underestimated the amount of gold held by the Chinese commercial banks.  At today’s Bloomberg event, Roland Wang, the World Gold Council’s Managing Director for China, put the gold holdings of the Chinese commercial banks at the end of 2015 at 2,690 tonnes – which will presumably have risen further during the first four months of the current year. China’s ‘official’ gold holdings as reported to the IMF, plus its own reported 9 tonne gold purchase in April stand currently at around 1,808 tonnes. If we add in the commercial bank numbers we come up with a combined total of just short of 4,500 tonnes, plus any accumulations by the commercial banks since the start of the year, which would put it comfortably in second place behind the USA with its 8,133.5 tonnes. 

That the Chinese commercial bank gold holdings could be utilised in extremis by the Chinese government was alluded to in a discussion between Ken Hoffman and Hong Kong-based Philip Klapwijk.  Ken is Bloomberg Intelligence's Senior Metals and Mining Analyst who put forward this theory to Philip Klapwijk, Former Executive Chairman of GFMS before its takeover by Thomson Reuters, now Managing Director of Precious Metals Insights, who agreed that this was indeed a logical position.  Both are experienced China watchers and will have a better perspective on this than most other analysts.

But China has also been ‘economic with the truth’ in the past in reporting the true levels of its reserves through holding some of its gold in non-reported separate accounts.  It appears to be more transparent in its reporting nowadays but no-one, presumably apart from within the Chinese government, knows whether there are still unreported gold reserves. One suspects there are but putting a figure on them would be pure speculation.

So by using the commercial banks' holdings - even without taking into accpount any surreptitious hidded reserves,  it would seem that the Chinese government can already  get its hands on close to 5,000 tonnes of physical gold assuming some additional intake by the commercial banks in the first four months of the current year.

As was also pointed out at the AMA/Sharps Pixley bulls and bears gold debate, also in London,  two days earlier, China has been in the position of not only being the world’s biggest producer of gold, but at the same time is also by far the world’s biggest importer, which is almost certainly unique in the history of the global gold market when the world’s top producers have always exported most of their gold.  This emphasises perhaps how important gold is in the Chinese psyche and in the firm belief by the government that building its gold reserves is diversification insurance against any potential deterioration over time in the value of the U.S. dollar and the feeling that a bigger gold reserve would enhance its positioning in the country’s aspirations for the yuan as a global reserve currency.  This year sees the yuan becoming part of the IMF’s Special Drawing Right in October, and it is possible that China may now see its job as already partly done, which could account for what may be a cutback in its monthly gold reserve increases which it has been reporting since July 2015.

 

 

18 May 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com