LAWRIE WILLIAMS: Does China hold more gold than the USA?
23 Nov 2019
On the face of things, the USA with 8,133.6 tonnes of gold in its reserves possesses around four times as much gold as China in its reserves as reported to the IMF, but is that really the case? Does China, in reality, hold rather more gold than it reports? We think it almost certainly does, but how much more is very much open to speculation. Indeed different analysts have vastly differing theories ranging from as much as 30,000 tonnes down to the just under 2,000 tonnes it reports.
Our own view has always been that China has been surreptitiously been hoarding gold in accounts it justifies as not being reportable to the IMF. Indeed it has admitted to so doing in the past when it has reported zero gold reserve increases on a month-by-month basis but then announced very substantial rises in its purported gold holdings after several years of reporting these zero monthly increases. Indeed other observers have noted that, in addition to the central bank’s announce gold reserve the Chinese military holds gold in its own right as does the nation’s Sovereign Wealth Fund, neither of which holdings are seen as reportable by the Chinese central bank unless and until some of this gold is transferred into the People’s Bank of China (PBoC)’s own holdings.
But this is probably not all. China’s indigenous banks are, at the very least, mostly state controlled and they certainly hold gold in their own reserves for domestic financial transactions, and there are undoubtedly other state controlled entities which also hold gold – the only real question is how much, and what of this, if any, should come into the national gold reserve figure? We suspect the PBoC has a claim on all this additional gold should the state wish to use it.
Given that China has been the world’s largest gold producer for some 12 years now and the largest importer of gold for the past five years, yet exports virtually none of this gold, it certainly has plenty of scope for building its gold reserves year in year out. There is also the strange anomaly that all the major gold analytical consultancies report Chinese gold consumption at an annual level of around half that calculated from the nation’s own production, known imports from countries which break down their gold exports on a country-by-country basis and scrap conversion. This difference could be going into some of the accounts comprising what is, in effect, a hidden government-controlled reserve.
UK commentator, Dominic Frisby, sets out some of the above points, and crunches the numbers, in his own take on China’s total current gold reserve holding. He concludes that the government plus individual holders of gold in China may hold around a total of over 25,000 tonnes of gold between them and this is all set out in a YouTube video which is worth watching to assess the accuracy, or otherwise, of his conclusions – see https://www.youtube.com/watch?v=tOHZop5-fAc . Perhaps half of this gold is directly controlled by the government, he avers, and should be included in the country’s official reserve figure.
We have always commented in the past that China has continually understated its true reserve figures, although have been loath to estimate them as being as high as Frisby’s analysis suggests. But if China’s reserves are as high as he suggests, why is the country not reporting them fully?. He comes up with several reasons why this may be the case.
Firstly, he reckons that if China was to publish its full reserve holding it would be embarrassing to the U.S. and if the reserve was as big as he estimates it would suggest that China has designs on replacing the dollar as the world’s reserve currency which would be tantamount to a declaration of war against the dollar. China is probably not ready for this – at least not yet!
There was also rife speculation at the recent LBMA event in Shenzhen that China was heading towards launching a gold-backed currency alternative to the dollar, with the gold holding providing increased credibility in world financial markets. Given the sensibilities of the current trade dispute between the U.S. and China, this would be decidedly unhelpful. Such an announcement could also strengthen the yuan considerably in global currency markets which again would not be helpful for the Chinese economy which relies heavily on its global exports for the current time. It is working hard to build domestic wealth so it can replace the majority of its exports with domestic demand, but it’s not nearly there yet.
Also if China really does hold around 12,000 tonnes of gold as he suggests this would have a major positive impact on the gold price and China might well be against this as it may still be in the process of building its gold reserve and a significantly higher gold price would not be conducive to accumulating gold at the lowest possible price.
Frisby starts and ends his YouTube presentation with the old adage, ‘He who holds the gold makes the rules’. Currently it is the U.S. which officially has comfortably the world’s largest reported gold reserve and which ‘makes the rules’. How long will it be before this position is held by China, which may already have the world’s largest economy (the facts are in dispute here) and is growing at around double the rate of U.S. growth, even at today’s reduced levels?