China reveals big rise in gold reserves

China reveals big rise in gold reserves
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2009
Published: April 24 2009 09:31 | Last updated: April 24 2009 15:37
http://www.ft.com/cms/s/0/1d23f80c-30aa-11de-bc38-00144feabdc0.html?nclick_check=1


China has nearly doubled its gold reserves in the last five years as it diversified its enormous foreign exchange reserves away from US dollar assets, the head of the country’s secretive foreign exchange administration said in a rare disclosure on Friday.

The country now holds 1,054 tons of gold, up from the 600 tons it last disclosed in 2003, according to Hu Xiaolian, head of the State Administration of Foreign Exchange (Safe), which manages the country’s $1,954bn in foreign exchange reserves.

The spot gold price rose 1 per cent on Friday as investors saw the news as a sign China will further increase its gold holdings as it continues to diversify reserves away from the US dollar.

“China still has only a very small percentage of its forex reserves held in gold, much less than the United States or other developed countries,” said Paul Atherley, Beijing-based managing director of Leyshon Resources. “Those holdings are still too low in terms of the size of its economy and the growing significance of its currency.”

At current prices, China’s pot of gold only accounts for around 1.6 per cent of its entire foreign exchange reserves. The value of its total holding was reported as $31bn.

The move comes as European central banks continue to sell their gold and the International Monetary Fund has discussed selling some of its bullion reserves.

“This is probably the most significant central bank announcement since the Central Bank of Russia announced at the LBMA gold conference in Johannesburg in 2005 that it wanted to hold 10 per cent of its foreign exchange reserves in gold,” said John Reade of UBS.

But some analysts said the current slowdown in China’s reserve accumulation could negate any reallocation of existing reserves into gold, which is unlikely to be large or abrupt.

“As for the issue of ‘diversification’ that everyone pays so much attention to, we have strict rules that restrict us to concentrating our allocations in major currencies and high-quality assets,” Ms Hu said on Friday.

China became the world’s largest gold producer last year and Ms Hu said the increase in gold reserves had come primarily from domestic production and refining.

“Without any obvious intervention in the global market China can subtly and quietly diversify part of its reserves into gold by buying domestic production,” Mr Atherley said.

China National Gold Corporation, the country’s biggest gold producer, is state-owned so Safe does not have to go through a private company to make its gold purchases.

China has been diversifying away from the US dollar since at least 2005, when it broke the renminbi’s peg to the dollar and officially pegged it to a basket of currencies, but still holds more than two-thirds in US dollar-denominated assets by most estimates.

As its trade surplus and foreign exchange reserves ballooned in recent years it continued to buy huge amounts of US Treasury bonds while increasing the proportion of new purchases it allotted to other currencies and to gold.

China’s forex reserves grew from $623bn at the start of 2005 to $1,906bn at the end of September last year but in the last six months the spectacular growth has slowed to a virtual stop, with reserves rising by just $7.7bn in the first quarter.

That means smaller new purchases of everything from US Treasuries to gold.

China now has the fifth-largest gold pile of any country and is one of only six countries with public holdings of more than 1,000 tons, according to Ms Hu.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tons.

“It’s not a matter of a few hundred, or 1,000 tons. China should hold more because of its new international status, and because of the financial crisis,” he said. “The financial crisis means the US dollar’s value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage.”

Additional reporting by Chris Flood