Does China plan a Gold-backed Renminbi?

We expect the Chinese central bank to continue gradually accumulating gold, and we think that it might be planning a gold backing for the renminbi. If that were to happen, international acceptance would soar. Not for nothing was the enormous amount of gold reserves in the United States (N.B. the US reserves were at 29,663 tonnes in 1953) along with military dominance a central reason for the US dollar becoming the global reserve currency.

Since the Chinese current account surplus has been on a steady decline, the widely held opinion of the massive undervaluation of the Yuan seems to become more susceptible to questioning as well. Therefore, a quick internationalisation would make perfect sense from a Chinese point of view. Officials have also confirmed this hypothesis. The Head of Research at the People´s Bank of China recommends investing in gold in order to protect and diversify China´s currency reserves95. Zhang Jianhua said that gold was the only safe haven for risk-averse investors, whereas other forms of investment from government bonds to property were losing value”. It was necessary for the Chinese government to further optimise the portfolio structure of its currency reserves. He advised buying gold on relative weakness.

A former central banker claimed that US Treasuries were not safe in the medium to long term. In addition, China will launch a new investment fund that will invest parts of the more than USD 3,000 in currency reserves in energy and precious metals. PBoC advisor Xia recommends holding only USD 1,000bn in currency reserves, with the rest to be earmarked for strategic investments. He goes on to suggest a gradual increase in gold reserves and recommends pursuing a “buy the dip” strategy over an extended period of time. He also advises PBoC to add silver to the official reserves. At the same time, an official of the Chinese Chamber of Commerce said China should step up its gold reserves to as much as 8,000 tonnes. Ji Xianonan, head of the Chinese State Council´s State-Owned Enterprise Supervisory Board, has recently suggested that China ramp up its gold reserves within the next three to five years to 6,000 tonnes. Within ten year´s time, China would want to own 10,000 tonnes of gold. This means that China would have to buy almost 40% of annual production until 2020. The significance of such statements can hardly be overestimated. Experience shows that they tend to be accorded with the government and party leaders.

According to the statistics of the World Gold Council, the Chinese central bank did not make any purchases in 2010 or 2011. Official reserves were last reported in June 2009 at 1,054 tonnes. The gold imports from Hong Kong amounted to more than 100 tonnes in April alone; in the year to date, 240 tonnes of gold have been imported. There is a clear upward trend in place: between May 2010 and April 2011 China imported 66 tonnes, and a year later imports were at 489 tonnes – an increase of 640%99. In total, imports in 2011 amounted to 427 tonnes (as compared to 118 tonnes in 2010). We expect not only Chinese private investors but also the PBoC to continue stepping up their accumulation of gold reserves massively. We believe that China holds definitely a far higher volume of gold reserves than the officially confirmed 1,054 tonnes.

chinese gold imports from hong kong 2009 2012 gold silver insights

Sources: Datastream, Bloomberg, Reuters, Erste Group Research

Felix Somary´s account of the Chinese mentality of 1913 makes for a fascinating read, “In Europe nobody would understand the Chinese mentality back then; Europe was at the peak of its power, full of confidence in the present and the future, amused at people who would reject banknotes and who would suspiciously put metal money on a scale to verify its weight. The consensus was that they were trailing us by five generations – when the truth is, they were one generation ahead. They had experienced the fortune of billions on paper under Mongolian emperors – war conquests and road construction – and they had then seen the bitter ending of it all. This experience had stayed with them throughout the centuries.”

By Ronald-Peter Stoeferle, Precious Metals Analyst, Erste Group Research.

This article is an excerpt from Erste Group Research and their July 11, 2012 Gold Report titled ‘Gold Report 2012 – In GOLD we TRUST´.

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