China is Hoarding the World’s Gold

Despite China being the largest producer of gold in the world, its central bank has been at the forefront of a surge in purchases of the precious metal on the international market as it seeks to reduce its reliance on the dollar.

The east Asian nation produced 375 tonnes of gold in 2022, according to figures by the World Gold Council, an industry body, but in the first nine months of 2023, its state bank was responsible for acquiring 181 tonnes out of a total 800 tonnes purchased by central banks worldwide.

Its gold reserves are estimated to be 2,113 tonnes as of July—the fifth largest behind the Federal Reserve’s 8,133—and now comprise 4 percent of its total declared assets. The Chinese Central Bank has been recorded adding to its stockpile of gold for 11 consecutive months.

While the full extent of China’s holdings and purchases are opaque to international observers, experts say the increase in interest in gold is part of a broader move away from dollar-based assets that has been taking place for a while, at a time of financial and geopolitical volatility.

Rather than seeking to influence the U.S. economy, they say, China’s gold rush could be an attempt to shore up its fiscal position with a stable and highly saleable asset as bond markets suffer and its relations with Western nations sour.

“It’s probably a diversification strategy and it’s probably part of an effort to reduce their vulnerability to any potential sanctions that the United States would pose on the Chinese financial system,” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics and an expert on the Chinese economy, told Newsweek.

“I think they see what has happened to Russia, and they see what’s happened to Iran being cut off from international financial networks. They’ve been promoting the RMB [Chinese yuan] as an international currency—they haven’t had much luck yet, but that’s certainly their long-term goal—they want to diminish the role of the dollar, so it seems perfectly logical that they would diversify their holdings, their official foreign exchange holdings, away from the dollar.”

Tensions between the U.S. and China have been simmering since the appearance of a spy balloon over America earlier in the year—which Beijing denied had nefarious purposes—and fueled by an ongoing trade war between the nations.

There is also heightened sensitivity toward China in the U.S. over national security concerns. Since the spy balloon incident, questions have been raised of land purchases near U.S. Air Force bases, while it has been accused of stealing American agricultural technology and intellectual property.

But shoring up China’s finances against a potential diplomatic crisis with America is not the only potential reason for its voracious gold acquisitions.

“I think this is an investment decision, pure and simple,” Julian Jessop, an economist and fellow at the Institute of Economic Affairs think tank, told Newsweek. “Central banks have been diversifying out of U.S. dollar assets for some time so this is part of a broader trend. Indeed, switching from U.S. government bonds to gold has been a good trade recently, as the Treasury market has slumped.”

In order to combat post-pandemic inflation, many central banks have raised interest rates, which have in turn affected government bond yields that drive down the return on such investments. That has led to a worldwide rout in the government bond market due to high yields that haven’t been seen for more than a decade.

In contrast, gold is viewed as a relatively stable investment able to retain value against inflation. Since 1971, gold futures prices have appreciated by about 5,700 percent. So it is little surprise that, according to Gainesville Coins, a U.S.-based bullion dealer, global gold reserves peaked in June at 38,764 tonnes.

“Most central banks are concerned about the stability of their assets, the liquidity of their assets and so forth,” Lardy said. “Very few central banks are managing their reserves in order to maximize returns.”

A large-scale sell-off of U.S. government bonds in favor of gold could in theory create volatility in the market that might hamper America’s recent economic recovery. But while China has been suspected of using underhanded tactics against its rivals, economists say this would hurt its fiscal position as well.

“Some will doubtless argue that this is a political play to drive up U.S. interest rates and undermine the U.S. economy,” Jessop said. “But this would hurt China, too, because China is still a large holder of U.S. government bonds and therefore [would be] taking large losses.”

“Contrary to widespread perception, if China buys fewer U.S. assets, this will not hurt the U.S.,” Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management, told Newsweek. “Foreign buying of U.S. assets is good for Wall Street and large owners of movable capital, but it is bad for U.S. workers, most producers, farmers and the middle class because the sale of U.S. assets to foreigners must be balanced by American trade deficits.”

Whether the Chinese Central Bank’s posture toward dollar-based assets has changed remains unclear from the outside.

Lardy said that while official estimates suggest they have on paper gone down over the past five months, “we don’t have any visibility into the dollar assets that they hold in other accounts in Europe or somewhere that don’t get tracked by the U.S. Treasury.” Were America to implement sanctions on Chinese assets, it is not certain these arms-length assets would be subject to them.

The same obscurity over China’s finances means that, while the Chinese Central Bank does buy gold mined in the country, “our visibility of what they buy domestically is quite limited,” Lardy said.

Though China’s gold purchasing could be to protect its position against geopolitical risk, its economy still relies on U.S. government assets to stay in the black.

“It may be buying gold to reduce its exposure to U.S. dollars and, consequently, to the possibility of sanctions,” Pettis said. “But the scale is still pretty small, mainly because as the only country willing and able to run large deficits, the U.S. is the main provider of assets against which countries like China can accumulate surpluses.”