Why Is China Purchasing Its Domestic Gold?

In April 2009, China gave up temporarily its famous privacy

, and announced it bought 454 tonnes of gold to enrich its reserves. Another intriguing figure in this respect is represented by the 3,000 tonnes of gold owned by Chinese households, most of them purchased in the last five years. As intriguing is the fact that China is the sixth owner of gold bullion in the world. How to explain this unprecedented gold hunger, both at state level and at household level? Of course, the number of Chinese may explain these figures to an extent and so can the availability of the said gold, given that it comes from its own mines; it is also a fact that China is presently the largest producer in the world of the yellow metal.

The high gold consumption by the Chinese people that it is expected to double in the next 10 years seems to arise from the threat of the continuation of the global economic crisis: people try to find alternative safer ways to preserve or increase their wealth, turning their attention to gold, known for its perennial value, therefore they prefer to purchase jewelry or gold bullion instead of buying currency. What about the Chinese government? No matter the failure of the fiscal and monetary policies when faced to the worst global economic crisis ever, why to purchase such an amount of gold, and domestic one?

But the reason for the Peoples Bank of China buying such an amount of gold is less apparent. First, without reducing the significance of such an impressive purchase, gold represents only 1.6% of the total Chinese reserves, which are nevertheless the largest worldwide. The remainder consists of US governmental bonds. As such, what is of great concern for the central bank when buying gold is the $744 billion represented by its American treasuries. The last thing it would like to see is to determine an increase in the price of gold. It is interested in maintaining a low price on the domestic market for its citizens and its own purchases after all. On the other hand, a higher gold price would mean a weaker dollar, or what would happen to the value of its numberless US bonds?

So the explanation has to do with the economic interests China has in America. China has a twofold reason for avoiding the devaluation of the American currency: first is its large reserves in that currency and second the fact it needs badly a market to export its products or the US is its main client in this respect. Its very economic growth is at stake.

In conclusion China is purchasing its domestic gold because it produces it on such a large scale and for hedging its US governmental bonds.

by: Jack Wogan.

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