China needs caution in drive to up gold reserves

By Liang Jie (People's Daily Overseas Edition)

08:33, August 19, 2011

Edited and Translated by People's Daily Online 

According to data on every country's gold reserves recently issued by World Gold Council (WGC), the United States’ gold reserves are 8,133.5 tons, accounting for 26.49 percent of the world’s total, and the Untied States is still the largest gold reserve country. China’s gold reserves are a little more than 1,054 tons, ranking sixth in the world. 

Although China's gold reserve is not less in quantity, it accounts for only 1.6 percent of China's total foreign reserves. In comparison, the Untied States' gold reserves account for 74 percent of its foreign reserve, and even emerging countries including Russia and India have gold reserves accounting for more than 5 percent of their foreign reserves. Insiders said that it is good for emerging economies to hold more gold reserves. It is the trend that the Central Bank of China will hold greater gold reserves. 

The gold purchased by every country in 2011 is three times as much as the gold they purchased in 2010

In fact, before Standard and Poor's downgraded the U.S. credit rating, the central bank of every country already started to gradually increase their gold reserves because of the European and U.S. debt crises and the declining confidence in the U.S. dollar and Euro. People have noticed that the countries that dumped gold in the past 20 years actually turned into net gold purchaser in 2010 because they want to realize foreign reserve diversification and reduce dependence on the U.S. dollar. 

According to data issued by the WGC, governments of all the countries have purchased a little more than 203 tons of gold in 2011, three times as much as the gold they purchased in 2010. It indicates that every country is more and more regarding the gold as a tool for resisting the depreciation of paper money and global economic turbulence. Currently, China's foreign reserves are definitely the largest in the world, but China’s gold reserves are still far less than the global average level. 

Jing Naiquan, head of the China Gold Investment Research Institute, said that the major role of gold is its stable value amid crisis. Holding gold can reduce the shrinkage of wealth and avoid the exchange rate risk in the foreign exchange market. Furthermore, state governments will likely face debt crisis after the international financial crisis. Thus, if a state government holds a certain proportion of gold reserves, it can use them to pay back debt. 

Therefore, gold is of great significance to preserve a country's financial security. The United States holds about 8,100 tons of gold reserves; Germany, 3,400 tons, and France and Italy each, 2,500 tons. These countries have paid high costs for their gold reserves, showing that they have drawn particular attention to the strategic importance of gold reserves. 

Gold reserves support national credit 

Although it is necessary for China to raise the relatively low proportion of gold reserves, many experts said that now is not the right time to do it. China can buy gold after market corrections. Many other people have also made suggestions about investing more foreign exchange reserves in gold. 

The State Administration of Foreign Exchange recently responded that the commodities such as gold, silver, oil and metal ore in the international market are characterized by dramatic price fluctuations, relatively limited market sizes and high transaction and purchase costs. Furthermore, as China's residents and enterprises have a huge demand for gold and oil, using foreign exchange reserves to make large-scale investments in these commodities will likely push up market prices, curbing the Chinese residents' consumption and economic development. 

Xu Hongcai, vice director at the Information Department of the China Center for International Economic Exchanges, said, "China has always held a conservative attitude toward gold reserves. The large gold reserves in the United States are rooted in history. It is neither practical nor possible for China to turn all of its foreign exchange reserves into gold. However, gold can be used to hedge risks and speculate. Generally, the more gold reserves China has, the better. However, China should not purchase a large amount of gold on the market now because its prices are already very high and will likely be higher. Therefore, China should take a long-term view of increasing its gold reserves."

Experts said that many countries are hoarding gold because it carries little risk. The United States holds more than 8,000 tons of gold to maintain a high credit rating. By contrast, emerging economies need to further increase their gold reserves. 

Increasing both private, government gold reserves 

China's central bank holds a disproportionately small amount of gold which cannot satisfy its urgent need to internationalize the RMB. The bank is bound to buy more gold, but the problem is that if it invests too much in gold in a short time, gold prices will be greatly pushed up, which will inevitably cost it more money than necessary. 

Jing said that it has been once again proven during the ongoing financial crisis that gold has most properties of money. Gold's money properties are not obvious in times of economic stability, but it can be treated as a hard currency in times of war, crisis or recession. China should make full use of gold’s duality, and steadily increase the share of gold in its foreign exchange reserves, so as to optimize the structure of reserves and strengthen its ability to resist financial risks. He suggested that more innovative gold investment products should be introduced to encourage people to buy gold. This way, both private and government gold reserves will be increased, and the country’s ability to handle risks and emergencies will be strengthened over time. 

Xu said that the U.S. dollar-led international monetary system will continue, and a return to the gold standard remains unlikely. The RMB internationalization will not be able to put an end to dollar dominance in the short term. At present, China's central bank may not increase the proportion of gold in foreign exchange reserves because a sharp rise in investments will definitely push up gold prices. However, the people should feel free to buy gold. In theory, it is never a bad thing for a country to increase the proportion of gold in its foreign exchange reserves.

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