China is buying a lot of gold. 32 tonnes last November, 30 tonnes in December – officially its total reserves are now 2,010 tonnes although many suspect the total is several times higher than that and could be as much as 30,000 tonnes. Officially gold represents just 3.5% of China’s reserves but as the world’s biggest gold producer, which for years now has churned out hundreds of tonnes a year and exports none of it, that’s clearly inaccurate.
The composition of foreign exchange reserves in China is a state secret. State secrets under Chinese law are defined as “matters that concern state security and national interests and… are known by people within a certain scope for a given period of time”. This woolly definition is appropriate given that what a state secret might be covers not just matters of national defence and foreign affairs but anything at all that the ruling communist party doesn’t want to talk about, including how much gold China has. The state secrecy of gold is not unusual in China. Data on all kinds of items – such as stocks of grain, cotton and other major crop – are state secrets.
The amount of gold is a secret and so too is the purpose of such accumulation. China is not likely to adopt a gold standard (i.e. pin its fiat currency to gold) but its gold accumulation will certainly give potential investors in the country much greater confidence and thereby strengthen its move into a Central Bank Digital Currency (CBDC), which (along with displacing the Dollar as the international reserve currency) is its long-term aim.
It’s obvious why China wants its money to gain international reserve status and knock the US Dollar from its perch – apart from the sheer delight in being the monetary ‘top dog’ – it would make life cheaper for its exporters, who would have lower borrowing costs, and with more contracts priced in Yuan China would be more impervious to the Dollar’s value.
As a paper published by the US National Bureau of Economic Research (NBER) last August (and revised this month) says: “While the Renminbi has a long way to go to rival the U.S. Dollar as an international currency, China’s real economic size and the size of its capital market could make the integration of its capital market into global financial markets a major shift in the international monetary system”. Untangling the academic language, China is approaching the point where its currency might challenge the Dollar’s reserve status. There have already been steps in this direction – in 2015 the International Monetary Fund (IMF) awarded the Yuan reserve currency status, giving it a 10.92% allocation in the IMF’s Special Drawing Rights (SDR, the IMF’s foreign exchange reserve assets) since when it has been raised to 12.28%.
Last October, Dong Dengxin, director of the Finance and Securities Institute of China’s Wuhan University of Science and Technology said the two-way deregulation of China’s capital market paves the way for the greater use of the Yuan in cross-border settlement and investment and for the Yuan to be increasingly adopted as a global reserve currency. The amount of gold might be a state secret but the aim of toppling the Dollar isn’t.
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