China added to its official gold reserves for the third straight month in February as the country continues efforts to minimize its exposure to the US dollar.
The People’s Bank of China added 10 tons of gold to its horde last month. It has accumulated an additional 32 tons of the yellow metal since the beginning of the year. According to the Financial Times, at this rate, China will surpass Russia and Kazakhstan as the leading central bank buyers.
In December, the Chinese announced the first increase in their gold holding since 2016. China now officially holds 1,874 tons of gold.
The Chinese have also been selling off US Treasury holdings. Over the past year, the Chinese have shed more than $50 billion in US debt.
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A Chinese analyst told the Global Times that the moves are “due to the US diving creditability as a result of the ‘hegemon-like behavior’ that’s on the rise in the US.” Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times that China wants to minimize its exposure to the US dollar.
“Since the start of the China-US trade dispute, China has realized that there are risks in holding the US dollar, and it is taking action to increase holdings of other financial assets such as gold to replace its US dollar-denominated assets to guard against those risks.”
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University, told the Global Times that there are also concerns about America’s “creditworthiness.”
“A common view has formed across the world that the decline in US creditworthiness, resulting from the ‘America First’ policy, the transition in US trade policy, and ‘flip-flopping’ of the US president, is hurting the global economy and destabilizing the global financial system. Therefore, many countries feel unsafe, and they are choosing to reduce dollar asset allocation to protect themselves from potential risks.”
The Chinese have a history of going long periods without any official announcement of its gold holding and then suddenly revealing a large increase in its reserves. In 2009, the People’s Bank of China stopped reporting its gold holdings. Then in June 2015, the Chinese central bank suddenly announced its gold hoard had grown by 57%.
For a little more than a year, the PBOC regularly announced additions to its gold reserves. Chinese gold holdings rose another 185 tons over the next 16 months before it suddenly went silent again. During this time period, China was pushing for inclusion of the yuan in the International Monetary Fund’s benchmark currency basket.
Many analysts believe China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE). Given the political dynamics and the ongoing trade war, it seems unlikely the Chinese suddenly stopped increasing their gold reserves in 2016.
China isn’t alone in buying gold. The Russian central bank has also endeavored to reduce its exposure to the dollar over the last several years by buying gold and selling off US Treasuries. Russian gold reserves increased 274.3 tons in 2018, marking the fourth consecutive year of plus-200 ton growth. In February 2018, Russia passed China to become the world’s fifth-largest gold-holding country.
There have also been efforts to limit exposure to the US dollar by setting up alternative payments systems and financial channels that don’t rely on the greenback. The Russians have developed an alternative payment system that has reportedly surpassed SWIFT in popularity within the country. According to the Central Bank of Russia, 416 Russian companies and government organizations had joined the System for Transfer of Financial Messages (SPFS) as of September.
And it’s not just countries that have traditionally rocky relations with the US looking for alternatives. In September 2018, the EU announced plans to develop a special payment channel to circumvent US economic sanctions and facilitate trade with Iran.
Gold offers countries some measure of independence from the US dollar. That means more political and economic independence and stability. Gold could even play a key role in a strategy to dethrone the greenback.
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