Why is China buying so much gold?

China’s central bank, the People’s Bank of China, bought gold again in February, lifting its reserves for the 16th straight month. This comes after China imported record amounts of gold last year – nine times the value it imported in 2020.

So what’s going on?

For a metal we’ve been trading for thousands of years, the gold market is still surprisingly complex, but you can divide demand broadly into three main categories: consumers, investors, and central banks.

And China is seeing more demand across all three of these right now.

1) Consumers 

Folks in China have been buying more gold partly for fun reasons, like celebrating Covid-delayed weddings, or ringing in China’s year of the dragon (when dragon-themed gold products are seen as auspicious).

But there are also less fun reasons at play – local bank deposit rates remain low, so consumers are buying more gold jewellery as a way to store wealth, bringing us to…

2) Investors

While China’s gold jewellery purchases jumped 10% last year, its demand for bars and coins (i.e. for investment) spiked 28%.

Investors in China, like everywhere else, see gold as a safe haven in turbulent times. But in China’s case, there are additional doubts right now around its economic recovery, worrying deflation, plus its parallel and persistent slumps in both real estate and stocks. That all makes gold an even more attractive option.

And that brings us to…

3) The People’s Bank of China

The People’s Bank bought more gold (225 tonnes) last year than anyone else, but the real figures are higher – China likely uses state-owned enterprises and other bodies to buy and hold its gold, too.

And China’s central bank has a few reasons to buy gold right now.

First, it’s trying to reduce its exposure to – and reliance on – the US dollar. Beijing saw how Washington used the dollar’s reserve status to seize assets and impose sanctions on Russia. So as China’s own ties with the West have frayed, it’s arguably diversifying away from the dollar to insulate itself against similar pressure.

Second, China continues to record massive trade surpluses with the rest of the world, and it needs somewhere to stash all that cash.

Third, China – like every country – needs reserves to help ride out economic and currency fluctuations (its yuan slid to a 16-year low last year).

Fourth, gold is still a relatively small proportion of China’s total reserves, at around 4%. To put that in perspective, the world average is ~15%, and in the US it’s ~75%. So China might also just be playing catch-up here.

And finally, many would say that shifting some assets into gold has simply been a good investment lately, particularly as government bond markets struggle.

So, just like for many of China’s (and the world’s) consumers and investors, gold makes a lot of sense for the People’s Bank right now.

INTRIGUE’S TAKE

With all this talk of China and gold, it’s easy to forget that China still relies heavily on the US dollar. Even China’s infrastructure loans via its Belt & Road Initiative are mostly in dollars. And if the People’s Bank decides to sell its gold one day? Yes… most gold globally is still bought and sold in US dollars.

The data (limited as it is) suggests that while China might be buying more gold and gradually reducing its stash of US treasuries, US assets still comprise more than half of China’s total reserves, roughly the same as a decade ago. That’s because, in addition to gold, China has also been hoovering up other US assets like agency debt (issued by bodies like Freddie and Fannie).

So, why so much attention on China’s moves here? It’s partly because, for such a closed system, there’s a tendency for outsiders (and even insiders) to fill the information vacuum with intriguing motives, like perhaps an effort to tank the US treasuries market – but something like this would harm China itself given its own massive US treasuries holdings (~$816B).

So maybe what we’re trying to say is that of course, countries optimise their reserves out of naked self-interest. But even at our most self-interested – hoarding vast piles of gold in a vault somewhere – we’re all still deeply interconnected.

Also worth noting:

• China’s total gold reserves are now at around 2,257 tonnes, behind the US (8,134t), Germany (3,353t), Italy (2,452t), France (2,437t), and Russia (2,300t).
• The spot price for gold hit a record high of $2,141.59 last week. Bitcoin hit another new record above $70,400 earlier today (Monday).
• Beyond China, expectations of rate cuts by the US Federal Reserve have also driven gold demand. Gold doesn’t pay interest, making it relatively more attractive as rates drop (and vice versa).