China gold reserves up 19 tonnes in July. Really?!

The People’s Bank of China (PBoC) – the Chinese central bank – had been somewhat reticent about reporting increases in its gold reserves as part of its total forex holdings having previously stated them as being at the same 1,054 tonne level for six years up until June before announcing that they were then actually magically 1,658 tonnes that month.  This amount was received with widespread scepticism, with most analysts reckoning they are actually far higher and there had also been criticism of the way the bank had been reporting its gold holdings – or rather not reporting them.

Now the PBoC seems to have changed tack and appears to be reporting its ‘official’ gold reserve figures on a month by month basis and for the latest month – July – now puts them at 1,677 tonnes – a rise of 19 tonnes in the month out of its now $3.65 trillion in total forex reserves – still equivalent to only around 1.5% of its total.  Per contra, the U.S. claims to hold an official gold reserve, of 8,133.5 tonnes – or 72.6% of its total forex holdings – and Germany 3,384.2 tonnes (67.8% of its forex total).  China thus would still seem to have an awful long way to go to catch up with the top Western nations’ holdings in purely tonnage terms and hugely more in percentage of its foreign exchange figures.

But how accurate are official gold holdings for any country as reported to the IMF anyway – at least in terms of nationally-owned gold?  There have been widespread doubts expressed about the true physical gold reserve figures of many Western nations – The U.S. in particular – as IMF rules allow leased and swapped gold to remain in the reserve figures as if they were still physically present.  Similarly, but on the other side of the coin, most Western analysts believe the Chinese reserve figures are hugely understated with massive amounts of gold held in ‘non-reportable’ government-controlled accounts, thus enabling the Chinese to avoid having to report much larger gold holdings to the IMF with a straight face.

And how important is the amount of gold held anyway?  Western central banks seem to decry any value to gold – yet still continue to hold vast amounts of it.  The Chinese and Indians, and a number of other nations too, seem to see gold as the ultimate money.  Whether gold is just a ‘pet rock’, as a recent disparaging article in the Wall Street Journal described it, or true money as perhaps half the world or more sees it, it still has a tremendous psychological hold.  It has been money, and been seen as the ultimate indicator of wealth, since time immemorial.  It is inbuilt into the collective psyche and that certainly will not change overnight – if ever.

It also seems to be the situation that in China, a very substantial gold holding – far above the currently stated ‘official’ figure – is considered to be a prerequisite for attaining a stronger position for the yuan in global trade.  However there are political niceties to be observed here in that China does not – at least for the time being – want to rock the U.S. economic boat and a huge increase in its announced gold holdings might be seen as doing so.  China’s initial aim would seem to be having the yuan accepted as being part of the SDR bundle, which would effectively bring with it reserve currency status.  Once this is achieved – who knows?

China’s limited yuan devaluation and controlled floating of the currency is being seen as a way of meeting at least part way some of the criticisms levelled at it by the IMF leading to a delayed inclusion within the SDR basket – which has to be inevitable ultimately.  If this SDR decision is delayed too long, given the U.S. dominance of the IMF in terms of voting power, China could see this as an unfriendly act stimulated by the Western superpower and make moves to destabilise the latter’s global position – and it has a strong capability for so doing given its huge forex holdings, mostly in U.S. treasuries.  But the time is not yet right, though if China has its SDR and reserve currency ambitions thwarted again the game could well change.  China thinks long term in a way the West mostly does not.  It may lose the odd battle but ultimately aims to win the economic war and who would give odds against the growing Asian superpower so doing!

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