Tag Archives: Chinese fx reserves

China’s Road To Secret Gold Accumulation

In august 2013 I published a translation from an article written by a Chinese gold commentator called Zhang Jie. In the article Zhang described how not only the US but also other western countries have been involved in manipulating the price of gold to control the international monetary system for decades. I suggest to read the full article – here are a few snippets:

…Gold leasing is an important innovation in the gold settlement system. Through continuous gold leasing the gold in the market can be circulated and produce derivatives, creating more and more paper gold. This is very significant for the United States. Gold leasing is a major tool for the Federal Reserve and other central banks in the West to secretly control and regulate the gold market, creating gold credit derivatives and global credit conflict.

…The purpose of gold leasing is not just to receive a rent, but it also provides the ability to short-sell gold, which allows central banks to interfere in the currency market.

…If the Fed’s large gold reserves are used in gold leasing, there will be a serious problem. Germany therefore will threaten the Fed’s dominant position by demanding their gold back; the Fed subsequently needs to withdraw the leased gold and thus could destabilize the market. This is a new credit game of international capital.

…The Fed probably has agendas aimed at preventing Germany to inspect its gold or to ship it back to Germany.

I recently came across another article by Zhang that I also found worth sharing. First you can read the article, then I will provide some comment. This article is dated 16-04-2013, but it must be a repost as the data in the text shows it had to be written Jan/Feb 2013. Everything in between [brackets] is written by Koos Jansen.

Translated By Soh Tiong Hum!

Zhang Jie: China’s Road To Secret Accumulation

2013-04-16  Author: Zhang Jie

Zhang Jie

Core hint: China may gradually acquire gold on the international gold market through non-central bank financial entities, the newly acquired gold shipped back to China to be converted into central bank gold reserves. Credit in various forms including gold reserves will support China’s Renminbi and its internationalization.

Unless military confrontation or economic sanctions take place between China and US, there should be little question about the safety of China’s gold reserves stored at the US Federal Reserve. The question of China’s gold is not its safety but rather to possess the ability to use it for market intervention, and to boost creditworthiness of the Renminbi.


Difficult To Bring Back Gold

Risk of losing China’s gold stored at the US Federal Reserve can be temporarily set aside because in comparison to China’s foreign exchange reserves, the risk to China’s foreign exchange reserves is larger than the risk of gold deposited at the Federal Reserve! Regardless of buying sovereign debt or depositing in the US financial system, there is risk of a mass default. A mass failure to fulfill obligation by Western countries should no longer be called a default but a crisis. Cash deposited inside the financial system has even more danger. Western banks can go bankrupt, even large corporations like Lehman. Therefore risk has to be looked at in relative terms, not just absolute ones. The gold question should be looked at from the angle of the global currency system. Whether gold should be stored in China has to be considered for the level of creditworthiness.

The PBOC operates on a ‘pool’ concept, which also needs gold. Considering the global credit game, it is highly necessary for China to develop her own gold reserves and must do so with a better strategy than Germany.

The US has already demonized China’s rise so if China were to ask to bring back her gold, it would surely lead to a tremendous confrontation. When China first shipped her gold to the US, it was meant for reform, opening up and removing US economic sanctions. To ask for the gold back now would be a political signal. China can wait to look at Germany’s outcome before considering to repatriate it’s own gold from the Federal Reserve. China does not yet have to pull her chestnuts out of the fire. If China were to make a fuzz about their gold, Western countries will point their fingers at China, but not to Germany because of their close relation.


Accumulating Gold To Convert FX Reserves

China can use its increasing foreign exchange reserves to buy gold continuously. When the US and European central banks are continuously leasing and short selling gold, China can buy this gold and take possession, adding them to domestic reserves.

It’s best to let domestic financial entities acquire gold rather than the PBOC, to create multiple positions in the domestic gold futures market, to create the impression of forced buying by private hands so as to shut off international opinion. 
Purchased gold is withdrawn from the futures market, stored with reserves held in core financial entities then moved to the PBOC for domestic safekeeping. Just like Western central banks use gold leasing and short sell gold, China also needs to employ deception to secretly accumulate gold in a timely manner.

It is a good time for China to use surplus foreign exchange reserves to purchase gold when central banks around the world are secretly leasing gold and short selling gold to prop up currency printing. During the 10 years after gold leasing was born [early eighties] the world sold gold short, while during the gold bull market short sellers in the gold leasing business covered their shorts. International gold price fluctuations after 2008 was when gold short selling commenced again, especially at the time when gold fell from USD 1900 and US and Western countries were running endless quantitative easing. With the gold price is running contrary to quantitative easing, it is highly probable that Western central banks or major institutions were short selling gold. With China acquiring gold till a currency crisis erupts and short sellers need to cover their position, international gold price will certainly rally, possibly resembling eighties like fluctuations. It is therefore a tremendous opportunity for China to buy gold now to hedge against risk from a global currency crisis.

China in possession of large amounts of gold, China has secretly accumulated more gold, is a way to fight developed countries that are depreciating their currencies with quantitative easing; China’s gold accumulation gives them caution about short selling gold and currency printing. This is the most effective means to protect China’s foreign exchange reserve wealth from the threat of the Western financial hegemony.

Great Wall of China

China’s GDP and foreign exchange reserves already exceed Germany’s. Therefore China must possess effective control over gold volume not less than Germany’s gold reserves. At the current price of USD 1700 per ounce, one ton of gold is worth USD 50 million. When gold rises to USD 2500 per ounce, one ton of gold is worth USD 75 million. If China brings in 10,000 tons, foreign reserve spending is merely USD 800 billion but this volume is roughly 30% of gold in global circulation [he means global official reserves!] and is going to be pole position in global markets. Spending such a small expense to swallow such a massive gold position is only possible when the world is short selling. Otherwise price will go sky-high when you buy 10,000 tons! Buying US government debt with China’s current foreign exchange reserves at USD 3.3 trillion yields less than the 0.25% Fed Funds Rate. With this very low yield, buying gold is a good deal.

More than 80% of the PBOC’s currency in circulation is foreign exchange. Depreciation by foreign currencies such as US Dollar forces Renminbi to lose its purchasing power and increases turbulence. This was the reason why China imported inflation years ago. If China buys gold in large amount now, she can choose to support the value of Renminbi with gold in future. Purchased gold will support Renminbi creditworthiness. At the moment, Renminbi’s creditworthiness is supported by the central bank’s foreign exchange reserves but the creditworthiness of foreign exchange in its possession is a function of the issuing country, not China. Supporting China’s creditworthiness is not just about buying gold but also buying China’s sovereign debt, government debt, core industry debt, Chinese real estate, Chinese rare earth, tungsten, antimony and so on. However, besides foreign exchange gold and precious metals are the most appropriate for use overseas to support Renminbi’s export and international policy.

The foreign exchange standard has more problems than a gold standard. The Renminbi wants to be internationalized and China wants to be wealthy and strong. If the Renminbi issuance remains linked to the US Dollar, then the Renminbi will just resemble many so-called international currencies, becoming merely a proxy of the US Dollar, unable to match the creditworthiness of the US Dollar. Internationalization of a pegged-Renminbi is a make-believe internationalization, just like the Hong Kong Dollar, freely changeable but confined to linked rates.


Though he’s not a politician Zhang provides us with interesting insights about China’s monetary policy.

My thoughts:

Zhang writes; “there should be little question about the safety of China’s gold reserves stored at the US Federal Reserve” (I asked my interpreter if this is really what he wrote, he really did..), while he clearly states these reserves held by the Fed are leased out and are thus NOT save. A few sentences later he writes; “Risk of losing China’s gold stored at the US Federal Reserve…”. In fact the rest of the article is about the importance of the PBOC holding official gold reserves in the mainland to strengthen the Renminbi. I don’t understand why he wrote the gold is safe in the US in the beginning.

“When China first shipped her gold to the US, it was meant for reform, opening up and removing US economic sanctions.” This underlines the dirty game the US is playing. It demands countries to store a part of their official gold reserves at the New York Federal Reserve so ultimately only the US controls the global currency market. According to this article, written in January 2013 by Liu Zhongbo from Agricultural Bank of China, at least 600 tons of Chinese official reserves are stored at the Fed.

“It’s best to let domestic financial entities acquire gold rather than the PBOC, to create multiple positions in the domestic gold futures market, to create the impression of forced buying by private hands so as to shut off international opinion. Purchased gold is withdrawn from the futures market, stored with reserves held in core financial entities then moved to the PBOC for domestic safekeeping.” I fully understand the PBOC is buying gold through proxies, however all my sources in the mainland ensure me the PBOC would never (indirectly) buy at the Shanghai Gold Exchange, which is the only domestic futures/deferred market where significant amounts of gold are being withdrawn from the vaults. On the Shanghai Futures Exchange withdrawals are neglectable. Maybe Zhang’s approach is wrong here.

The PBOC wants to diversify it’s FX reserves (USD) in gold, all gold on the SGE is quoted in RMB. It would make more sense for the PBOC to buy gold abroad in exchange for dollars, this would also circumvent SGE premiums. On the Chinese Foreign Exchange Reserves of the People’s Republic of China wikipedia page (not on the English page) it states:


The FX reserves of the Chinese mainland are State-owned assets and managed by SAFE and the PBOC. The real operations are done by the Bank of China.

The Bank Of China is a commercial state-owned bank and LBMA member, just like ICBC. It’s more likely the PBOC would make purchases through these channels.

Guest Post: Thoughts Behind PBOC Gold Purchase Policy

Written by one of my sources in the mainland, LK:

In the early parts of 2009 without being anticipated, China came forward and announced that its official gold reserve had leaped from 600 tons to 1054 tons. They haven’t announced any changes since then. This lack of communication is usually said due to the wish not to disturb the market (so they can buy gold more cheaply), but I found an article by Chinese gold analyst and columnist Xiao Lei last month suggesting much more thoughts are given by the Chinese authorities to this strategy. We have not seen this view being discussed in the English speaking world.

Xiao Lei
Xiao Lei

A few more words about 2009

That the PBOC should be, and has been, buying gold as a strategic reserve asset is no secret. Officially, the 454 tons increase in 2009 was done over the years since 2003, but Xiao Lei believes that it might have been amassed quickly from 2008 Q4 through to 2009 Q1 during the markets sell off (when gold fell from $1000 to $700 an ounce).

The 2009 announcement was interesting. In Xiao Lei’s words:

This high-profile announcement served the purpose of demonstrating China and the world that the PBOC has the capability to both stabilize and protect its financial markets (that depends on trust). It has indeed been increasing its gold reserve steadily, thus accumulating that one asset which the financial systems can ultimately depend on should all else fail.

The action not only showed a good quick return (at $900, even before the full price recovery), but also won much accolade and public encouragement within the country for the central bank to continue its gold-buying program. And for those who took note this was an endorsement, all said and done without disturbing the price.

This is the type of cues and support we should be watching for from China!

2009 to 2011

This bull phase saw the gold price double. Xiao Lei thinks that during this period, the PBOC has gone to the market at least 3-5 times. Other developing nations were also buying and declaring their increases, all in all leading to higher acquisition prices. If China were to announce a higher holding level now at about $1250, Xiao says that the central bank would face some pressure from public commentators it would rather do without.

During this time, different members of the PBOC senior management have repeatedly mentioned that gold purchases should only be done at opportune times without disturbing the market. YI Gang, the Director of the State Administration of Foreign Exchange and Deputy Governor of the PBOC, even said that China is a big gold country already and if the PBOC buys too much, it would lead to higher prices for China’s gold-consuming citizens, whether for wedding dowry or new year tradition, and this would not be good. All these suggest that the PBOC has now become mindful of its shadow in the market unlike before. It also paints a central bank that is sensitive to public opinions – something we are not used to seeing anywhere.


2013 The Stars Lined Up

The bear market from 2011 is almost a god send to the mandarins tasked with amassing the gold hoard. The market came to them without the aforementioned shackles:

1. Calls for foreign exchange reserve diversification were gaining momentum

This referred to the internal opinion within the country. Holding on to US Treasuries came under increasing pressure in media discussions, sometimes even turning accusatory. With the official gold reserve percentage so low, it is hard not to do anything but.

2. Shanghai Free Trade Zone (FTZ) received approval in 2013. RMB internationalization would be much more rapidly achieved with gold trading.

Gold is an international standardised commodity with plenty of liquidity. With gold, China does not have to open up its internal securities and debt markets for trading (which are not ready), and still has plenty RMB to use as unit of account and currency for trade. There is already a 2000 tons vault in the FTZ open for business (and the USD-denominated gold board has NOT received approval).

3. Liquidity and lower cost of gold purchases

As gold is a long term strategic asset, the price of gold is not an absolute concern on the books. As long as the acquisition does not cause a serious price reaction, the acquisition is a success. This is how it is viewed.

4. Cover from the “Dama” Aunties!

Because of media scenes of the wet market aunties flocking to and queueing up at the gold stores buying up everything, attention was well diverted away from the true needs of the PBOC to buy gold. Xiao actually wrote that PBOC’s buying did not raise concerns with the international monetary bodies and the markets just took the buying as regular consumer behavior, barely noticing the official sector, with the exception of a few specialized analysts (that’s you and us!). Moreover, there is no way of telling how much of the gold supplied to China will be ending up at the PBOC.

5. Trend of the time in history

Germany is being given the cold shoulder. The big direction is certainly to get your own gold and back on your own ground. So buying in size is in fact along the path of least resistance, the trendy thing to do.


As few realize that gold is a strategic asset in national security, few must realize that the announcement of gold reserves of a major country is also an important strategic decision that will only come from the highest of ranks. The deep implications this has on prices, perceptions and what it may provoke from the other players makes this an important card that will only be used casually by incompetent fools.

Through this article, we have learnt something about China’s internal interactions on this matter and what issues the PBOC is having to find itself sensitive to. The author Xiao Lei further remarked that not only will the timing and situation of the next announcement be carefully chosen, the actual level that will be announced will be decided with reasons too – meaning that the full holding will unlikely to be all plainly divulged.

2013 was in many ways a total bonanza, and one would be very naive to think that the PBOC would pass up on this golden window given their good understanding of the subject as seen in various speeches and writing within the nation!


The Need For China To Buy Gold

The other day Zero Hedge posted an image from a quarterly financial report from the Chinese central bank, the PBOC. When I first looked at it I thought for a minute the PBOC had announced a raise in their official gold holdings. Then I woke up and realized their gold holdings are disclosed in the second row from below, still stuck at 33.89 million ounces. I asked my friend in the mainland to translate the headers to get a better view on this summary. He was so kind to do so.

China Gold


China Gold translated

We can see Chinese FX reserves expressed in US dollars (which is still the most commonly used reserve currency and unit of account worldwide) having a total value of $3,821,315,000,000 (or $3.8 trillion) at the end of December. At least 34 % of these assets are denominated in US dollars in the form of US treasuries ($1.3 trillion). Only 1 % is held in physical gold according to the PBOC; 33.89 million ounces (1054 tons) was worth  $41,5 billion in December. Let’s compare these numbers with the a few other countries. From The World Gold Council:

World official gold holdings, January 2014

The Need For China To Buy Gold

China is in the top ten in terms of gold holdings, but only holds a fraction of gold relative to its total FX reserves.

The bulk of China’s FX reserves are extremely vulnerable for a devaluation of the US dollar. At the same time a devaluation of the US dollar is imminent, as Yu Yongding, a prominent Chinese economist and former member of the monetary policy committee of the People’s Bank of China, has expressed in numerous presentations. This is why China has a strong incentive to hedge against the USD by increasing their official gold holdings. From Yu Yongding at the LBMA conference 2012:

..Before taking over the Presidency of the Fed, Bernanke was very open in talking about the possibility of using inflation to solve the debt problem. He gained the very apt nickname ‘Helicopter Ben’, and I think he will rule out this option, but of course he will not say so openly.

..To push down the value of the dollar is another very important objective of QE, even though Bernanke refused to admit that this is the policy, I think Greenspan is more honest, because he is no longer the governor.

Essentially, the policy of QE is to shift the debt burden away from borrowers at the expense of creditors and I think this is basically the situation that China is facing.

Yu Yongding on QE

A big problem for China has been buying large quantities of physical gold without increasing the price. For this reason China’s strategy has always been to be as secretive as possible about its gold purchases. They don’t disclose their gold import numbers, nor any interim changes in official gold holdings. They hide their dire hunger for the yellow metal to simply bargain a better price. But sometimes their craving to buy gold (without affecting the market) slips through the media: 

Yu Yonding:

Yu Yongding on gold QE RMB

Li Yining:

China should increase its gold reserves appropriately, and China must take every chance to buy, especially when gold prices fall.


Want China Times:

China should now rapidly increase its gold reserves, without pushing up prices of the precious metal excessively.


Sun Zhaoxue:

It’s especially true that as global gold prices make new highs, increasing gold reserves also become more difficult.

So China’s main objective is to buy as much gold for as little dollars. The main objective of the US is to devalue the dollar.

A Summary Of Potentially Coherent Facts

  • The US debt problem has created the necessity to devalue the dollar in order to shrink their debt (and boost export).
  • China holds at least $1.3 trillion in FX exchange which will be wiped out by a US dollar devaluation.
  • The US and China have a strong trade relationship; Both benefit from China exporting cheap goods to the US.
  • The US and China share a mutual interest in holding the value of the dollar in check for trading.

Can it be these two mighty countries agreed in early 2013 to support the value of the dollar for the time being, while heavily suppressing the price of gold in the paper markets to allow China to accumulate as much of the yellow metal as needed? This would surely provide the best outcome for both after what inevitably will happen: a devaluation of the US dollar and a revaluation of gold.