PBoC Gold Purchases: Secretive Accumulation on the International Market
The official gold reserves of the People’s Republic of China (PRC) are held by China’s central bank, the People’s Bank of China (PBoC). According to the website of the State Administration of Foreign Exchange (SAFE), the PBoC official gold reserves are currently in excess of 1,840 tonnes.
Beyond the published data, China’s official gold reserves may be far larger than reported by the PBoC / SAFE. However, due to official Chinese secrecy in this area, it is difficult to quantify the potential size of PBoC gold reserves in excess of reported levels. Despite this, evidence exists that the PBoC has purchased hundreds if not thousands of additional tonnes of gold since 2009.
Evidence also suggests that these PBoC gold purchases are not made through China’s Shanghai Gold Exchange (SGE) but are instead executed in the Over-the-Counter (OTC) international gold market, including via the London Gold Market. Assuming this accumulation strategy is as it appears to be, then PBoC gold purchases will be distinct from gold flows into and out of the Shanghai Gold Exchange. This also means that in order to arrive at an estimate of total above ground gold held within China’s borders, official PBoC gold reserves need to be added to private gold reserves held in China.
However, since the PBoC does not reveal where it purchases its gold from, it is necessary to look at an array of evidence and commentary from other sources with does address this topic.
Although the Chinese central bank claims to hold only 1840 tonnes of gold, its true gold reserve holdings could be far higher.
While the PBoC does not comment, evidence suggests that it purchases gold on the international market and imports this gold back into China clandestinely as monetary gold.
Purchasing gold on the international market would allow the Chinese state to diversify its vast US dollar reserves.
A gold reserves-to-FX reserves ratio of 5% would currently put Chinese state gold holdings at nearly 4000 tonnes.
A gold-to-GDP ratio of about 1.77%, which is the equivalent of the gold-to-GDP ratio of the US, would currently put Chinese state gold holdings at nearly 5000 tonnes of gold.
Bypassing the SGE
In its July 2014 publication “Understanding China’s Gold Market”, the World Gold Council (WGC) explains why the PBoC would be attracted to buying gold on the international market and not on the Shanghai Gold Exchange:
“China’s authorities have a range of options when purchasing gold….But there are reasons why they may prefer to buy gold on international markets: gold sold on the SGE is priced in yuan and prospective buyers – for example, the PBoC with large multi-currency reserves – may rather use US dollars than purchasing domestically-priced gold. The international market would have a lot more liquidity too.”
Although the PBoC does not provide a composition breakdown of its $3 trillion portfolio of FX reserves, it is thought to be distributed with about 66% in US dollars, 25% in Euros, and the remainder in GBP and Yen. With two-thirds in US dollar investments, such as US Treasuries, this would be an approximate pot of $2 trillion with which to purchase gold from on the international market using US dollars. Logically these huge US dollars holdings should motivate the PBoC to purchase gold on the international market and not on the SGE where trading is only undertaken in Chinese Yuan.
SGE officials even on occasion have confirmed that the PBoC does not but gold on the Exchange. For example, in 2013, the President of the SGE Transaction Department confirmed to Na Liu of CNC Asset Management (Canada) that the PBoC does not buy any gold through the SGE. In his report addressing 2013 SGE gold withdrawals (which totalled 2,197 tonnes in 2013), Na Liu wrote that:
…none of the 2,200 tonnes of gold was bought by the Chinese central bank. The President said: “The PBOC does not buy gold through the SGE.”
Additionally, former Shanghai Gold Exchange chairman Xu Luode stated publicly that all gold supplied by the SGE in 2013 went to Chinese consumers and not to the PBoC. In his speech at the LBMA Bullion Market Forum in Singapore in June 2014, Luode said that:
“Last year , China imported 1,540 tonnes of gold. Such imports, together with the 430 tonnes of gold we produced ourselves, means that we have, in effect, supplied approximately 2,000 tonnes of gold last year. The 2,000 tonnes of gold were consumed by consumers in China….So last year, our gold exchange’s inventory reduced by nearly 2,200 tonnes, of which 200 tonnes was recycled gold.
PBoC Gold Acquisition in the International Market
If the PBoC is buying gold in excess of the amount that it offically reports, then logically it will not want these purchases to appear in import/export trade statistics. Like all central banks, the PBoC classifies and holds its gold reserves as “monetary gold” (i.e. “monetary gold is gold held as a reserve asset that is available to and controlled by monetary authorities”). Monetary gold is also exempt from reporting in international trade statistics / customs data. Therefore, like all central banks, the PBoC would not have to report any monetary gold that it purchased abroad and then imported into China.
However, there is a high level of transparency and scrutiny on the quantity of non-monetary that flows into China. Non-monetary gold is gold that is not held as a reserve asset by monetary authorities. This visibility into non-monetary gold flows exists because although non-monetary gold does not appear in Chinese trade statistics (since the Chinese don’t report it), it does appear in the trade statistics of China’s main gold suppliers such as the UK, Switzerland, Hong Kong, Australia and South Africa. All non-monetary gold imported into China (which is exclusively imported by a small number of approved commercial banks) is also required to be sold in the first instance through the SGE. Therefore, there is also high visibility into the relationship between gold imports through these channels and SGE gold withdrawals.
It would therefore not make sense for the PBoC to buy gold on the SGE since this would inflate SGE demand which would then have a knock-on influence on non-monetary gold imports into China. Whereas if the PBoC purchased gold directly on the international market and imported the purchased gold as monetary gold, this could be done in secret, and would allow the PBoC to accumulate gold reserves beyond published figures without generating any customs data trail whatsoever.
There is also anecdotal evidence that the Chinese state has brought gold across its borders, sometimes in unusual ways. In his book, The Death of Money (2014), gold expert and author Jim Rickards recounts an instance where a senior manager of security transport firm G4S confirmed that G4S had:
“transported gold into China by land through central Asian mountain passes at the head of a column of People’s Liberation Army tanks and armored transport vehicles. This gold was in the form of the 400 ounce good delivery bars”
The above may possibly be describing gold movements from Uzbekistan to China via Kyrgyzstani mountain passes. Its not clear due to the lack of detail, although Uzbekistan is Asia’s 3rd largest gold producer after China and Indonesia, with Kazakhstan ranked 4th largest. Although anecdotal, this story reinforces the belief that, similar to all other central banks, the PBoC has a preference for buying 400 ounce (12.5 kg) gold bars, and also supports the view that the PBoC does not import gold through visible channels such as the SGE which do not actively trade 400 ounce gold bars.
In a similar vein, a 2013 interview with Alex Stanczyk of the Physical Gold Fund SP recounted that a head of a global security transport firm was reported to have stated that 12.5 kg gold bars (400 oz bars) were being covertly imported into China on behalf of the PBoC:
“there is a lot of gold that they’re moving into China that’s not going through exchanges. If the gold is for the government they don’t have to declare where it’s going. They don’t have to declare where it’s going in, or where it’s heading.”
From London by Air Beijing
Additionally, reliable sources in the global gold market contacted by BullionStar precious metals analyst Koos Jansen have stated that the PBoC would not buy gold through the SGE and would use international markets instead. One of these sources, at a London-based gold market consultancy which has relationships with London bullion banks, confirmed that proxies of the PBoC purchase gold directly in the London OTC gold market which is then flown to the Chinese capital Beijing using their “own airplanes” (possibly transported by the Chinese gold army). London is also a very opaque gold market with no trade reporting, and central bank physical purchases of gold can be undertaken in extreme secrecy.
Note that all gold in the London Gold Market is held in the form of Good Delivery Bars, each weighing around 400 ozs. This gold is stored in the Bank of England and by a number of commercial vault operators such as HSBC, JP Morgan and Brinks.
If the Chinese State was buying large gold bars in the London Gold Market, then this should show up in changes over time of the volume of those gold bars held in the London vaulting network. Is there any evidence of such changes? The answer is yes.
According to the London Bullion Market Association (LBMA) website, at some point in 2011 the London gold vaults were holding 9,000 tonnes of gold. In June 2015, the LBMA stated in a presentation that there were approximately 6,250 tonnes of gold stored in the London vaults (500,000 gold bars).
Based on these data points, the total amount of gold stored in London fell by approximately 2,750 tonnes over the 2011 to mid June 2015 timeframe. However, during the same period, UK Customs data only recorded 1,000 tonnes net exported as non-monetary gold. There is therefore a residual decline of 1750 tonnes of London vaulted gold that is not explained by UK Customs data. Some of this 1,750 tonnes of gold could have been covertly exported from the UK as monetary gold. Such an outflow would support the claim that the Chinese state directly buys gold in the London OTC gold market through agents (bullion banks) and then airlifts this gold to Beijing using, in the words of the London consultancy source, their “own airplanes”.
The Hong Kong entrepot, now under Chinese control, is another potential source of gold for the Chinese State or its agents to channel monetary gold in from. Such an operation would take the form of importing non-monetary gold into Hong Kong from one or more of Hong Long’s main gold suppliers (Australia, South Africa, Switzerland, and UK), re-classifying it as monetary gold, and then exporting this monetary gold from Hong Kong to Beijing, while being exempt from trade reporting on the Hong Kong side (as well as on the Chinese side).
Diversifying China’s Official Reserves – Gold vs FX
China currently holds US$ 3.15 trillion in reserve assets, 97% of which, or $3.06 trillion, are in the form of foreign exchange reserves and only 2.34% are in gold. The remaining few basis points are in SDRs, and an IMF reserve position. This means that China’s FX reserves are 41 times larger than its gold reserves, in other words, the market value of the gold reserves is only 2.4% of the value of the fx reserves.
In February 2010, during the period of IMF gold sales, news publication China Daily reported that a top official from the China Gold Association (CGA) speaking anonymously had said that:
“Contrary to much speculation China may not buy the International Monetary Fund’s (IMF) remaining 191.3 tons of gold which is up for sale as it does not want to upset the market.”
“It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility”
However, these statements do not mean that China didn’t buy IMF gold during the IMF’s ‘on-market’ gold sales program in 2010, just that if it did, the transactions would be done in secret so as not to “upset the market“. This would also explain why the official IMF documents and board reports from 2010 discussing these IMF gold sales still remain ‘classified‘ by the IMF due to what it describes as ‘the sensitivity of the subject matter’. From the IMF documents which are available, it appears that the IMF used the Bank for International Settlements (BIS) in Switzerland as agent in executing this IMF gold sales program.
In March 2013, Yi Gang, deputy governor of the Chinese central bank, also noted how the Chinese state had to be cautious about official purchases so as not to upset the gold market:
“We will always keep gold in mind as an option in reserve assets and investments….we will also take into consideration a stable gold market. If the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers. We can only invest about 1-2 percent of the foreign exchange reserves into gold because the market is too small.”
Gang’s statement here resonates with that of the anonymous China Gold Association official i.e. that China “does not want to upset the market”, and would not publicly buy IMF gold since it “would trigger market speculation and volatility”.
How much gold might the PBoC be buying each year?
Various senior Chinese officials have independently indicated that China could be targeting purchases in the range of 500 tonnes of gold per year.
An August 2012 study by Zhang Bingnan, Vice President of the China Gold Association, on the optimal size of Chinese State gold reserves calculated estimates of PBoC gold reserves growth which implied that the PBoC buy approximately 500 tonnes of gold per year:
“Forecast[ing] the optimal gold reserve capacity in the next 20 years. The conclusion is: 2020, China’s gold optimal reserves should be 5,787 tonnes – 6,750 tonnes. 2030 should be 8,995 tonnes – 10,532 tonnes.”
In July 2014, Song Xin, China Gold Association (CGA) president, said that the PBoC should initially aim for a target of 4,000 tonnes of gold:
“That is why, in order for gold to fulfil its destined mission, we must raise our [official] gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.”
Purchasing 500 tonnes of gold per year goes a long way toward achieving this goal of reaching 4000 tonnes. Purchasing small quantities, and only holding 1840 tonnes in mid-2017 as the official data would suggest, does not achieve this goal.
Deutsche Bank Markets Research in a November 2014 research paper also claimed that the PBOC buys 500 tonnes of gold per year. As Deutsche said:
“In another example, the Chinese government’s open market purchases of roughly 500 tonnes per year have not prevented the gold price from plummeting in recent years.”
Various Chinese sources have also suggested, sometimes in tandem, that the PBoC aims to hold 5% of its official reserves in gold. On 26 March 2015, Roland Wang, China Managing Director for the World Gold Council (WGC) said in a Reuters interview that:
“China currently holds about 1.6 percent of its foreign exchange reserves in gold, which is relatively low compared with developed countries and some developing countries.”
“The ideal amount should be at least 5 percent of its total forex reserves,”
On the same day (26 March 2015) Chinese newswire Caixin published a story by Hedge Fund manager Li Sheng saying said:
Gold accounts for only 1.6 percent of China’s forex reserves. This is only a fraction of the figure in the United States and many other developed countries. If China ever increased the level to 5 percent, it would have an enormous impact on global demand for gold.”
How both Li Sheng and Wang can reference the exact same numbers on the exact same day, 1.6% and 5% of total FX reserves, is odd, unless they were both quoting from the same informed source. Since these statements were made in March 2015, the market value of China’s gold reserves, at $73.5 billion, now represents 2.41% of China’s FX reserves.
Gold-to-FX and Gold-to-GDP
For China’s gold reserves to represent 5% of FX reserves, the PBoC would need to hold 3800 tonnes of gold, which is more than twice the amount of gold that the Chinese State current claims to own, and interestingly is also a figure near the ‘Step 1’ target level of 4000 tonnes of gold which CGA President Song Xin referred to in mid 2014.
A country’s gold-to-GDP ratio (gold holdings to size of economy) is also another comparison metric that can be used to gauge the possible true scale of China’s current gold reserve holdings. For example, in 2016 China’s Gross Domestic Product (GDP) was $11.2 trillion. In comparison, for 2016, the GDP of the United States was $18.6 trillion. At current market prices, the US Treasury’s official gold holdings of 8133 tonnes represents 1.77% of US 2016 GDP. For China to have the same gold-to-GDP ratio as the US (i.e. 1.77%) would imply that China needs to be holding 4910 tonnes of gold.
Thus, on a gold to fx reserves comparative basis, and on a gold to GDP basis, the Chinese state could be holding in the region of 4000 – 5000 tonnes of gold in its official gold reserves, and only divulging 1840 tonnes of these true holdings (i.e. only divulging between 37-46% of its true gold holdings). This is not a certainty, just a possibility, but a distinct possibility. Such a strategy would allow the PBoC to continue to accumulate additional physical gold while avoiding ‘upsetting’ the gold market, but would allow the PBoC to be further ahead in its gold accumulation agenda than is publicly acknowledged.
References and Links
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3.^ “Understanding China’s Gold Market”, page 9, World Gold Council, July 2014 http://www.gold.org/research/understanding-chinas-gold-market
4.^ “China’s large forex reserves constitute both a blessing and a curse”, Financial Times, 30 September 2014 https://www.ft.com/content/9dfa88ce-2ea1-11e4-afe4-00144feabdc0
5.^ “Confirmation PBOC Doesn’t Purchase Gold Through SGE”, BullionStar Blogs, October 2013 https://www.bullionstar.com/blogs/koos-jansen/confirmation-pboc-doesnt-purchase-gold-sge/
6.^ “The Development and Opening of China’s Gold Market”, Xu Luode, Chairman, Shanghai Gold Exchange, LBMA Singapore Bullion Market Forum 2014, June 2014 http://www.lbma.org.uk/assets/events/Singapore%20F/LBMABMF2014_S2_02Xu_en.pdf
7.^ IMF Definition of Monetary Gold, https://stats.oecd.org/glossary/detail.asp?ID=1677
8.^ International Merchandise Trade Statistics 2010 (IMTS) drafted by the United Nations, https://www.slideshare.net/undesa/international-merchandise-trade-statistics
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14.^ LBMA website vaulting page imprint, April 2014, Wayback Machine (Internet Archive) https://web.archive.org/web/20140426111123/http:/www.lbma.org.uk/vaulting
15.^ How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults https://www.bullionstar.com/blogs/ronan-manly/how-many-good-delivery-gold-bars-are-in-all-the-london-vaults-including-the-bank-of-england-vaults/
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18.^ IMF Gold Sales – Where ‘Transparency’ means ‘Secrecy’, September 2016 https://www.bullionstar.com/blogs/ronan-manly/imf-gold-sales-transparency-means-secrecy/
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21.^ Song Xin, Sino Finance, 30 July 2014 (in Chinese) http://finance.sina.com.cn/nmetal/tzzs/20140730/153019863945.shtml[fn. “China Aims For Official Gold Reserves At 8500t” BullionStar, September 2014 https://www.bullionstar.com/blogs/koos-jansen/china-aims-official-gold-reserves-8500t/
22.^ “Peg worth its weight in gold: A detailed analysis of the Swiss gold referendum”, Deutsche bank Markets Research, November 2014, page 5: https://static.bullionstar.com/blogs/uploads/2015/05/Deutsche-Bank-Markets-Research.-Peg-worth-its-weight-in-gold-a-detailed-analysis-of-the-Swiss-gold-referendum.pdf
23.^ “China should boost gold reserves to 5 pct, says World Gold Council”, Reuters, 26 March 2015 http://www.reuters.com/article/china-gold-idUSL3N0WS23H20150326
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