Commentary: Beijing stockpiles on gold to hedge against potential economic downturn

Is China’s move a power play to displace the US dollar as the global currency of exchange or a tactical move to strengthen its hand before Xi Jinping meets Donald Trump? Tom McGregor shares his insights on the news.








China is the world’s largest producer and consumer of gold, Tom McGregor points out (Photo: AFP/Sebastian Derungs)

By Tom McGregor

14 Jun 2019 06:40AM (Updated: 14 Jun 2019 06:50AM)

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BEIJING: China has been snapping up gold over the last few months, raising eyebrows among market watchers.

Its central bank has increased gold holdings to US$79.8 billion with purchases of almost 16 tonnes of bullion last month alone, a three-year record high for the country.

Many believe the People’s Bank of China’s (PBOC) move to build up vast gold reserves is a power play that signals a first step in the eventual demise of the US dollar as the world’s most dominant currency.

Under this theory, China has capitalised on historically low prices of gold over the past year to stockpile the precious metal. Its ultimate aim is to acquire enough to back the Chinese yuan and create a new international monetary system based on the yuan as the currency of exchange.

That should sound familiar because that was how the US dollar, once fully convertible to gold, had become the international standard by which countries settled their international balances, after the historic Bretton Woods agreement, which create the foreign exchange system post-World War II.


FILE PHOTO: A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, China April 3, 2014. (Photo: REUTERS/Petar Kujundzic/File Photo) 

Such analyses have stoked concerns. China’s central bank appears to be seeking “determined diversification” away from US dollar assets, according to Helen Lau, an analyst at Argonaut Securities, cited in a Bloomberg news report.

Some also say that China is strengthening its position in the lead-up to President Xi Jinping’s meeting with US President Donald Trump.


Nevertheless, the notion that Beijing can stockpile sufficient gold reserves to eventually replace the US dollar or diminish the strength of the US economy are greatly exaggerated. The numbers speak for themselves.

While China’s gold reserves are valued at US$79.8 billion, by no means an insignificant sum, China’s holdings of US treasuries of notes, bills and bonds are valued many times over at around US$1.2 trillion.

The country also continues to ramp up purchases of US debt in recent weeks, which explains the drop in the Chinese yuan compared to the dollar, hovering at 6.92 yuan to US$1, as of Jun 13.