- China offered a rare peek into its financial system on Friday, releasing an update on its gold reserves for the first time in six years.
At the end of June, China’s gold holdings totaled 53.32 million troy ounces, up 57% from the end of April 2009, the last time the People’s Bank of China reported reserves.
China’s hoard puts it in the top five for government holdings of the precious metal. The U.S. has 261.5 million ounces of gold, followed by Germany, Italy and France, based on data from the International Monetary Fund. China now eclipses Russia and Switzerland in terms of reserves.
Gold futures prices fell to a five-year low Friday, as stronger economic data boosted investors’ expectations that the U.S. Federal Reserve will raise interest rates in 2015. The precious metal doesn’t pay interest or dividends and would struggle to compete with yield-bearing assets when rates climb. The most actively traded contract, for August delivery, fell $12, or 1%, to $1,131.90 a troy ounce on the Comex division of the New York Mercantile Exchange, the lowest close since April 1, 2010.
The increase in China’s gold holdings highlights the precious metal’s role in the global financial system as a bank reserve asset. Central banks, as a group, have continued to buy gold over the past three years even as prices plunged more than a third from their record, set in 2011.
Still, China’s reserves were lower than many market participants had expected, given the country is the world’s largest producer of gold and has vied with India as the world’s largest consumer of the precious metal.
“The figure published by the PBOC is roughly half the market consensus on what we had thought they had accumulated,” said Ross Norman, chief executive of London-based bullion broker Sharps Pixley. “The interesting thing about the announcement is the timing. China has clear ambitions to create a global reserve currency to challenge the hegemony of the U.S. dollar and to fill the void created by the declining holdings by central banks of the euro.”
China is seeking IMF recognition of the yuan as an official reserve currency on par with the U.S. dollar, the Japanese yen, the euro and the British pound. An IMF decision is expected later this year. Winning that status could elevate China’s role in global finance, although the yuan, whose value is tightly controlled by the government, is unlikely to pose a serious challenge to the dollar anytime soon.
“They want to have a much bigger presence at the international level and they want their currency to be considered a reserve currency,” said Simona Gambarini, a commodities economist at Capital Economics in London. “In order to do that you need to back it up with a certain amount of gold.”
The PBOC said in a statement that it takes a long-term and strategic perspective according to its needs regarding international reserves allocation.
China’s release of its gold reserves also could be a move to calm investors, analysts said. In recent weeks, a drop in China’s stock market rattled both domestic and international investors and sparked fears of a broader economic slowdown.
“This announcement may be to show China is well-stocked in resources and has sizable reserves to support the market if need be,” Mr. Norman of Sharps Pixley said.
Including Friday’s announcement, the central bank has reported changes to its gold reserve levels only four times over the last 15 years, analysts at UBS said in a note.