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China's Latest Gold Grab

Written By Geoffrey Pike

Posted July 20, 2015

chinahinagoldChina recently provided a status update on its gold reserves. It had been about six years since its gold holdings were last updated.

According to the People’s Bank of China, it now holds reserves of 1,658 tons, or the equivalent of just over 53 million troy ounces. This is a 57 percent increase from 2009 when the Chinese central bank held 1,054 tons.

While this is still nowhere near the United States’ official gold reserves of 8,133 tons, it is still a significant increase, especially in an era where gold no longer officially backs any major currencies.

Some analysts expected China to report even greater holdings. Some discussed the possibility of 3,500 tons.

Of course, we still don’t know if the number is real, as with so many things coming out of China. There are reasons both ways for Chinese officials to underreport or over report the actual holdings.

Chinese officials have likely been underreporting, at least up until now. If you are a big buyer of gold, it would make sense to not let people know how much you are buying. This will keep the price lower than it otherwise would have been.

On the other hand, the Chinese government is trying to have a more influential currency on the world stage. Chinese officials are delusional in thinking that higher gold reserves is going to get the yuan to be part of the IMF’s basket of currencies.

If the Chinese want to make the yuan a player on the world stage, how about starting by making it a freely floating currency? How about allowing foreign investors to buy and sell yuan on the open market?

Unfortunately, the Chinese government has convincingly shown the world over the last month that it does not embrace free markets. It has enacted anti-trade laws that you would expect out of a third-world country.

Since the stock market has taken a nose dive in China, we have seen a ban on short selling, the halting of trading of nearly half the companies, and a prohibition of large shareholders from selling for a six-month period. In addition, the Chinese government is attempting to force buying by the big players.

China is still called a communist country, but some think it is more capitalist than the U.S. now. It is neither in reality. It is a system of cronyism and central planning. It is better than communism was, but still a long way from free market.

A Golden Ticket

The Chinese central planners have built up some massive malinvestments, particularly over the last decade. There was already a real estate bubble that was about to crash. Instead of allowing that to happen, the central planners decided to blow up a stock bubble.

Now it is all crashing down. The market is so rigged at this point, there is not much point in paying attention to the Chinese stock market.

The Chinese have also continued to foolishly pile up massive amounts of U.S. Treasuries. As of May 2015, China was the largest foreign holder of U.S. debt, with over 1.27 trillion dollars. Japan is not far behind, but the next largest is in the 300 billion dollar range.

Just about everything the Chinese government has done lately has been economically stupid. Perhaps the only thing that was a little bit smart was increasing gold reserves.

China’s gold reserves still make up a small percentage of its total reserve holdings, but at least it is something.

It will be interesting to see what happens if the Chinese economy really tanks. What happens if we start to see more civil unrest there? And what if the Chinese government all of a sudden finds itself with dried up funds?

If the Chinese government gets desperate and doesn’t want to resort to hyperinflation, it may find itself willing to sell off some of its assets to appease the 1.3 billion people living there.

The obvious place to start would be selling U.S. Treasuries. I have heard rumors for a long time now that the Chinese are about to start selling its U.S. debt holdings. This hasn’t happened yet. They are unsubstantiated rumors.

The Chinese central planners are mercantilists who think they need to prop up their exporting sector by holding down their currency, which includes buying U.S. government debt. Since they don’t understand the economy, maybe the distorted economy they have built up will finally force them to take some action in unloading U.S. debt. Let’s hope they don’t compound their errors by selling the gold holdings instead.

While the gold reserves do not officially back the yuan, they do provide a source of some confidence in the currency that might otherwise not be there.

If the Chinese government really wants to help the people there, it should sell its nearly 1.3 trillion dollars in U.S. debt and distribute it to the 1.3 billion people. Then the people can use it to buy gold for themselves.

While it is nice that the Chinese central bank has increased its gold buying, it would be nicer if the Chinese people could increase their gold buying more significantly.