Commentary: Beijing stockpiles on gold to hedge against potential economic downturn

Commentary: Beijing stockpiles on gold to hedge against potential economic downturn

Is China’s move a power play to displace the US dollar as the global currency of exchange or a tactical move to strengthen its hand before Xi Jinping meets Donald Trump? Tom McGregor shares his insights on the news.

The Shanghai Gold Exchange has set the price for 99.99 percent gold at 256.92 yuan ($39.71) per gram
China is the word’s largest producer and consumer of gold, Tom McGregor points out (Photo: AFP/Sebastian Derungs)

BEIJING: China has been snapping up gold over the last few months, raising eyebrows among market watchers.

Its central bank has increased gold holdings to US$79.8 billion with purchases of almost 16 tonnes of bullion last month alone, a three-year record high for the country.

Many believe the People’s Bank of China’s (PBOC) move to build up vast gold reserves is a power play that signals a first step in the eventual demise of the US dollar as the world’s most dominant currency.

Under this theory, China has capitalised on historically low prices of gold over the past year to stockpile the precious metal. Its ultimate aim is to acquire enough to back the Chinese yuan and create a new international monetary system based on the yuan as the currency of exchange.

That should sound familiar because that was how the US dollar, once fully convertible to gold, had become the international standard by which countries settled their international balances, after the historic Bretton Woods agreement, which create the foreign exchange system post-World War II.

FILE PHOTO:  A Chinese national flag flutters outside the headquarters of the People's Bank of
FILE PHOTO: A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, China April 3, 2014. (Photo: REUTERS/Petar Kujundzic/File Photo)

Such analyses have stoked concerns. China’s central bank appears to be seeking “determined diversification” away from US dollar assets, according to Helen Lau, an analyst at Argonaut Securities, cited in a Bloomberg news report.

Some also say that China is strengthening its position in the lead-up to President Xi Jinping’s meeting with US President Donald Trump.

GOLD HOLDINGS NOT SO SIGNIFICANT

Nevertheless, the notion that Beijing can stockpile sufficient gold reserves to eventually replace the US dollar or diminish the strength of the US economy are greatly exaggerated. The numbers speak for themselves.

While China’s gold reserves are valued at US$79.8 billion, by no means an insignificant sum, China’s holdings of US treasuries of notes, bills and bonds are valued many times over at around US$1.2 trillion.

The country also continues to ramp up purchases of US debt in recent weeks, which explains the drop in the Chinese yuan compared to the dollar, hovering at 6.92 yuan to US$1, as of Jun 13.

FILE PHOTO: A Benjamin Franklin U.S. 100 dollar banknote and a Chinese 100 yuan banknote with late
FILE PHOTO: A Benjamin Franklin US 100 dollar banknote and a Chinese 100 yuan banknote with late Chinese Chairman Mao Zedong are seen in this picture illustration in Beijing, China, January 21, 2016. (Photo:REUTERS/Jason Lee/File Photo)

Had Beijing been serious about crushing the US dollar, and finding leverage to outmanoeuvre the US, we should have seen its central bank dump US treasuries, or enhance its holdings of foreign currencies including the euro, the British pound and the Japanese yen to drive a wedge between the US and its allies.

The reality also is that Beijing storing up gold reserves has little impact on the US economy.

PREPARING FOR A GLOBAL SLOWDOWN

A more accurate interpretation is that China, like many other countries, is watching very closely global economic indicators, in anticipation that the global economy may be heading towards gloomier days.

As it strives to buffer its people from the harmful effects of a downturn, the Chinese are responding in a routine manner to protect themselves against potential headwinds by making safe investments to protect coffers and shoring up reserves of the US dollar and gold, both of which tend to rise in value when the international economy slows down.

In other words, China’s surge in gold buying should be interpreted as an economic strategy, and less with the lens that this might be some sort of a one-upmanship move in the ongoing US-China trade chess game.

JUMPSTART FOR SHANGHAI GOLD EXCHANGE

A more accurate interpretation of China’s motivation is this: The buying up of gold has allowed China to strengthen the Shanghai Gold Exchange as a platform for trade on the precious metal, on par with other established gold exchange markets in London, New York and Hong Kong.

gold bar
A 250 grammes gold bar.

China is already the word’s largest producer and consumer of gold. Authorities in recent years have talked of their ambitions of making the Shanghai Gold Exchange a premier player on the precious metals’ global scene.

The Shanghai exchange has also become the largest physical gold exchange market over the last nine years, where buyers take physical delivery of gold. 

As trading volumes rise, the Chinese central bank has to purchase more gold and deliver bullion to the trading floor in the Shanghai market.

Chinese citizens have access to the gold and can diversify their investments. As fears about a property bubble burst loom large, many ultra-rich families are putting a higher proportion of their fortunes in gold. 

Middle-class Chinese also continue to see gold as a steady long-term store of value.

But the question remains whether there will be a sell-off, as gold reaches record highs, and prices remain volatile.

Until then, the Chinese central bank’s recent gold-buying spree may appear aggressive, and no doubt observers will be watching Beijing’s every move in the lead-up to the meeting between Trump and Xi.

But China’s recent move is more accurately one of economic hedging, rather than some geopolitically motivated strategy to shore up its position vis-à-vis the US.

Tom McGregor is a commentator on Asia-Pacific affairs based in Beijing.

Source: CNA/nr

Bookmark