The Chinese Gold market: Lost In Translation
There are a few analyses making rounds on the internet about gold owned by the People’s Bank Of China (PBOC). I’m always interested in these analyses, as I like to be aware of all knowledge available on this subject, but I rarely agree with them.
The big questions that remain in the gold space are, (i) how much gold does the PBOC truly have, (ii) how and where is this gold stored, (iii) how much of the imported (non-monetary) gold ended up at the PBOC or at the private sector.
In previous posts I’ve shared my analyses: I think the PBOC buys most of its gold abroad where they monetize the metal after which it can be imported into China mainland without having to be disclosed in publicly available customs reports (these monetary gold flows would be invisible to us, therefor I don’t know how much gold the PBOC has). All the gold that is disclosed in publicly available customs reports as export to China is directed through the Shanghai Gold Exchange (SGE) where it’s bought by private investors and institutions, not the PBOC. That’s my main thesis, although I don’t rule out the PBOC is able to interfere in the domestic Chinese gold market and the SGE.
The problem we encounter is that there has been a lot more gold sold through the SGE than all consultancy firms (WGC/GFMS/CPM) disclose as Chinese gold demand. The difference, which is at least 2,000 tonnes, is thought to be PBOC gold accumulation. In addition, there are a lot of precious metals on the balance sheets of Chinese commercial banks, although it’s unknown what these precious metals truly represent. Is it gold, silver or platinum and who is the owner? Many analysts think the PBOC buys gold on the SGE through commercial banks and leave this on balance sheets of these banks before it can be flipped to the PBOC’s balance sheet.
Chinese President Xi Jinping recently confirmed the practice of moving the People’s Bank of China’s reserve assets to other entities in China [quote from Xi]: “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals” This might explain where some of China’s gold hoard, that many suspect they posses but have not reported as reserves, may be located.
And in another Smaulgld post:
If indeed China holds gold with … any of the Chinese state owned banks, the PBOC could roll up that gold on to its own balance sheet in order to show more gold reserves quickly and easily in one month with a single entry.
In this post I would like to focus on the quote from Xi. It was copied from a written interview with the Wall Street Journal that was republished on iCross China. The original Chinese text was published on China network. In Chinese Xi said:
Translated by a friend of mine in the mainland:
First, the ownership of part of the foreign exchange reserves was transferred from the central bank to institutions like domestic banks, enterprises and individuals. For example, the balance of the foreign exchange deposits of all kinds at domestic banks increased 56.9 billion USD, with a 27-billion increase in August alone.
I think this is what happened: in the original Chinese text it said 外汇存款, which means foreign exchange deposits, but the translator working for iCross China translated it into foreign exchanges, which was interpreted by Smaulgld as being foreign exchange reserves. The essential difference is that foreign exchange deposits are owned by the private sector (at domestic banks) and foreign exchange reserves are owned by the central bank.
What Xi meant was that the Chinese private sector (banks, enterprises and individuals) was exchanging yuan for US dollars at the Chinese central bank. In turn the PBOC used its foreign exchange reserves to supply US dollars to the private sector in exchange for yuan. Subsequently, foreign exchange deposits at domestic banks grew by $56.8 billion, reflected in a matching decline of $56.8 billion in the PBOC’s foreign exchange reserves. In short, yuan went from the private sector to the PBOC, US dollars went from the PBOC to the private sector.
Currently there is downward pressure on the renminbi and the PBOC is defending the value by selling its foreign exchange reserves and buying yuan. When the Chinese private sector wants to exchange yuan for US dollars, which eventually is done through the Chinese central bank, the PBOC would not buy US dollars in the international foreign exchange market for this purpose, as this would lead to a declining value of the renminbi. Instead, the PBOC exchanges its own foreign exchange reserves for yuan, which are then transferred to the private sector and deposited as foreign exchange deposits at domestic banks. Needless to say, the US dollars transferred from the PBOC’s foreign exchange reserves to domestic banks, as foreign exchange deposits, are no longer the PBOC’s foreign exchange reserves.
Concluding, there are no foreign exchange reserves transferred from commercial bank balance sheets to the PBOC’s balance sheet or vice versa, nor has any gold been transferred this way.
Another quote that popped up at several blogs, after it was published on Reuters, was the one from Fu Xuejun, strategist at Huarong Securities Co. When the Chinese stock market was collapsing in the beginning of July this year, Fu Xuejun said/wrote:
The government must rescue the market, not with empty words, but with real silver and gold…
In my opinion this was wrongly translated. Fu Xuejun probably wrote 真金白银, which is a phrase that means “real money" not “real silver and gold". This is a common pitfall as in many languages the word for gold or silver is the same as for money. For example, money in French is argent, but silver in French is also argent.
I’ve been told Fu Xuejun is known in China purely as a stock trader with very little knowledge of gold and silver. Therefor, most likely, Fu Xuejun meant to say that the government needed to use money out of its own pockets to rescue the stock market instead of empty words. Fu Xuejun replied to my email:
I mean “real money”, not with physical gold and silver. “真金白银”is a idiom meaning a lot of real money.
I should add, gold on the balance sheets of Chines banks could be copied to the PBOC balance sheet IF the Chinese adopt the Turkish system, wherein gold savings by citizens deposited at commercial banks also show up on the balance sheet of the Turkish central bank, albeit double counted, as commercial banks in Turkey can use gold as part of their Reserve Requirement Ratio at their central bank.
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